The balance of risks around our optimistic growth and benign trade outlook would shift materially if the scope and magnitude of tariffs were to broaden across countries and sectors, or if we encountered greater retaliation from China and other countries impacted. In this scenario, we believe macro costs would likely include higher inflation and rates, and lower global growth. So far, developments on both fronts suggest the economic impact of President Trump’s turn to protectionism may be relatively contained:
- Lower magnitude and smaller country and sector scope of tariffs than expected.
- US tariffs introduced so far exempt a specified unit of initial imports or certain countries, and in the case of solar panels and washing machines, are temporary. The country exemption for steel and aluminum imports has expanded from Canada and Mexico initially, to a temporary reprieve for the European Union, Australia, Argentina, Brazil and South Korea.
- Focus is squarely on reducing competition from China. The “Section 301” investigation concerns China’s intellectual property protections and technology transfer practices, and on March 22 the US Administration announced a 25% tariff will apply on $50bn of imports from China. Sectors affected by these tariffs are not yet clear, but will likely include aerospace, information communication technology and machinery. And while there will be micro, company-level implications, the macro calculations do not raise concerns. For context, $50bn is equivalent to around 2.2% of China’s exports or 0.4% of its gross domestic product (GDP), and a 25% tariff on $50bn amounts to just 0.1% of China’s GDP.
- Restrictions on investments have not yet been implemented. The White House has noted “restrictions on investment by China in sensitive U.S. technology” are in the pipeline, but reports that the US and China are discussing trade issues to avoid escalating tensions suggests there may be some compromise in this area.
- Soft retaliation
- China has been measured in its response so far, though the announced tariffs on $3bn of US products on March 23 may be in response to steel and aluminum tariffs rather than the more recent Section 301-related tariffs.
- Other trade partners have not yet hinted at retaliatory measures. Japan is not on the list of countries exempt from tariffs on steel and aluminum exports, but we do not anticipate near-term retaliation. Japanese goods are high value-add and therefore well-positioned given a lack of substitutable products from other countries. Any economic impact would be manageable given aluminum and steel exports only account for only around 2% of Japan’s total exports. Canada and Mexico will likely continue to receive exemptions until renegotiation of the North American Free Trade Agreement (NAFTA) concludes, and as discussed earlier, within emerging markets, we do not expect US focus to extend beyond China.
Last year we noted greater protectionism would reconfigure trade relationships and plot a new distribution of winners and losers. Fast forward one year, and we are reassured that a “Trade Showdown” has not played out. The US has withdrawn from the Trans-Pacific Partnership, pressed ahead with renegotiation of NAFTA and introduced targeted tariffs, but rhetoric appears to be toning down and measures may be insufficient to steer earnings and growth momentum off track. Global markets remain underpinned by healthy growth and accommodative financial conditions, but evolving US trade relations demonstrate that headwinds remain, and so we believe investors should continue to look beyond traditional asset classes and borders.
