Investment outlook 2019: Mid-year update - Trade war - J.P. Morgan Asset Management

Investment outlook 2019: Mid-year update - Trade war

Contributor Karen Ward
Will the US China trade war prove fatal for global recovery?


In July, the US economy will have recorded the longest expansion in history. Unemployment is at or near multi-decade lows in the US, Germany, Japan and the UK. And yet there are few obvious signs that the global economy is overheating. Sectors prone to exuberance – housing and investment – are far from booming. Inflation – often the harbinger of economic doom – is notably absent. Indeed, if anything, the worry for the global economy is that inflation remains stubbornly low. Overall, despite its age, the global expansion doesn’t look to have reached its natural limits.

But political upheaval is threatening the outlook. UK prime minister Theresa May has given up hope of achieving a Brexit deal that can appeal both to her Conservative colleagues and the rest of the UK parliament. The Italian government is at loggerheads with Brussels. And, of more systemic concern for the global economy, trade negotiations between the US and China appear to have broken down.

At the root of the US-China dispute is a deep disagreement over technology. The US administration believes that the state-led subsidies China offers its tech sector provide its firms with an unfair advantage over US tech companies. Overlaying the issue of “fairness” is a concern that Chinese technology could also threaten US national security.

Beijing denies the security threat and is reluctant to abandon the support it provides to its flourishing tech sector. There seems to be no common ground. Even if a deal can be struck in the coming months, it is likely to be partial and highly conditional. The below shows the extent to which the tariffs are reversing a multi-decade period of globalisation.

US tariffs compared to history

%, effective tariff rate (tariffs collected as % of all imported goods)

Source: Esteban Ortiz-Ospina and Max Roser “International Trade”, US International Trade Commission, USITC, US Census, J.P. Morgan Asset Management. Currently effective tariffs includes tariffs on washing machines, solar panels, steel and aluminium, as well as tariffs implemented on approximately USD 250 billion of China imports. Remaining China imports and global autos (including auto parts) are measures proposed on approximately USD 290 billion worth of goods for each. Data as of 13 June 2019.

Directly, the tariffs themselves are unlikely to be fatal for the global expansion. The US exports 0.6% of its GDP to China. China has more at stake given it exports 3.6% of its GDP to the US. But even after the recent escalation, the direct numbers at this stage are relatively small. Although in theory the tariffs should raise inflation, we suspect the final inflationary impact will be small and instead Chinese producers and a moderately weaker renminbi will absorb some of the cost and US profit margins much of the rest.

Eurozone and US future capex intentions

% change year on year (LHS); index level, 4Q moving average (RHS)

Source: Duke CFO Global Business Outlook, Haver Analytics, IFO, Refinitiv Datastream, J.P. Morgan Asset Management. Duke CFO future capex intentions is expected growth in next 12 months. Past performance is not a reliable indicator of current and future results. Data as of 13 June 2019.

The indirect effects are likely to be of much greater magnitude. These include the disruption to supply chains as companies reroute or onshore processes currently completed abroad. The greatest economic impact will be companies scaling back investment plans, a process the data suggests is well underway.


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