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Trade War: What is it good for?

Barbara Saunders

A lot of attention is currently being focussed on the latest set of tariffs that the US is imposing on China. Despite the large numbers involved we don’t believe that investors should be concerned about the tariffs per se, but should be aware of the bigger macroeconomic picture and let this guide them in their investment decisions. Contributor Barbara Saunders, Managing Director – River and Mercantile Solutions.

The origin of the tariffs imposed by the Trump administration can be traced as far back as 2015, where in his candidacy announcement he seemed to touch a nerve with his embryonic support base arguing that China was taking US jobs and “ripping” the economy. Since then, belligerent campaign promises in the run up to the election have manifested into action which saw tariffs implemented on $250bn worth of goods. The latest $200bn of tariffs could disrupt a planned conciliatory meeting between Chinese vice-minister of commerce Wang Shouwen and Washington officials which was meant to soothe relations.

We feel that investors should look through the noise that this ongoing story is generating and appreciate that trade balances are only one part of a macroeconomic story between the two countries. Tariffs implemented by the US so far had largely been strategically chosen to inflict damage on Chinese industries, leaving other export sectors of the Chinese economy relatively untouched. However, the latest tariffs will see this increase to more than half of bilateral trade. Even so this only equates to 1.6% of world exports. While China is a key trading partner for the US it only totals 8.4% of US exports, behind Canada and Mexico, leaving less scope for China to retaliate.

While important, a pure focus on trade, or a sub-component of trade which the tariffs are affecting, will not inform investors fully unless considered alongside other macroeconomic areas relating to unemployment, inflation and economic growth to give a more a rounded view of a fundamental case for either region. Other indicators such as recent news of Chinese new orders declining to a six-month low could be seen as a more prominent headwind to future growth. And while the prospect of tariffs may have coincided with China’s equity downturn year-to-date, this should also be considered in the context of a deleveraging drive designed to reverse the country’s rapidly increasing debt-to-GDP measure.

As such, tariffs are not the only game in town when it comes to monitoring trade and gauging demand, but given Trump’s partiality to communicate his feelings via the strength of deals in tweet-form, it could provide a continuing strong predictor to how the relationship between the two countries is evolving.

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