Trade tensions: A fight on many frontsContributors David Lebovitz, Gabriela Santos, Hannah Anderson
- Trade related headlines have been overwhelming over the past few months. It is important for investors to separate tariffs that have been enacted from tariffs that are still under discussion.
- The magnitude of tariffs imposed so far by the U.S. and its trading partners is quite small, but their relevance would increase if the situation continued to escalate.
- Making direct and indirect links to an impact on U.S. and global economic growth and inflation is difficult. However, given the increased importance of trade for the global economy, an escalation of trade tensions is a source of downside risk to growth and a source of volatility for capital markets.
- As a result, investors should remain balanced in their asset allocation, and avoid overreaching for yield or return at the current juncture.
The topic of trade has become a fixture of the news cycle, leaving investors wondering where things stand with respect to tariffs and their potential impact on the economy. Free trade matters for growth in both the short and in the long term, as actions that restrict trade could put sand in the wheels of the global expansion by disrupting production, increasing costs for businesses and/or prices for consumers, limiting the positive transmission mechanism between economies, and, ultimately, decreasing productivity. However, the scope of trade restrictions matters too—to start the conversation, it is important to separate the enacted tariffs from those still under discussion.
A little bit of signal and a lot of noise
So far, tariffs have been imposed on imports of lumber, washing machines, solar cells & modules, and steel & aluminum (with exemptions for certain countries) (Table 1). Together, these account for USD 54 billion of U.S. imports, which is equivalent to 2% of all U.S. imports or 0.3% of U.S. GDP (Exhibit 1). In response to these actions, our trading partners have implemented tariffs on USD 22 billion of U.S. exports, or 1% of all U.S. exports. Seeing the implementation of tariffs is without question a bit unsettling, but the numbers are still quite small and should not yet materially alter the trajectory of U.S. growth and inflation.
TABLE 1: WHAT WE KNOW
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