How could trade tensions affect global markets?Contributor Maria Paola Toschi
At the root of the dispute is the technology sector, and US and Chinese negotiators are unlikely to find common ground.
Maria Paola Toschi
The trade dispute between the US and China shows few signs of resolution. Why are global tariffs rising, which economies are most vulnerable and how can investors position themselves for this more challenging environment?
Since his election, President Trump has sought to correct what he and his administration perceive to be trade injustices working against the US economy. These policies have considerable backing from the US electorate and the Democratic Party. Whilst China is the key focus, there is still a risk that the dispute broadens to the EU. This is weighing on global growth, largely because companies are deferring investment. If a further escalation prompts companies to cut jobs then the risks to this expansion will rise, regardless of more dovish central banks. It doesn’t seem politically optimal for the President to take risks with the expansion given he hopes to gain a second term in November 2020. But our conviction on the outlook for the trade conflict is not high and investors should think about adding assets to a portfolio that will perform in times of market stress.
What is the root of the dispute?
Global trade tensions began in 2018 when the US government imposed tariffs on certain imports, including solar panels and metals-ending a multi-decade process of US trade liberalisation. Since then, tariffs as a percentage of all imports have remained relatively low. But, if the US goes ahead with proposed further charges on Chinese imports and new taxes on auto sector imports, the average US tariff rate will return to levels not seen since the 1940s (Exhibit 1).
Exhibit 1 - US effective import tariff rate
% effective tariff rate (tariffs collected as % of all imported goods)
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