Global Trade: Confidence is still the main channel to watch in trade spat – US-China trade tensions have continued to escalate, with the US set to publish a list of imports worth $200bn (0.25% of global GDP and 1.2% of world trade) that will be subject to a 10% tariff, potentially by September. Although this threat was already made some months ago, the increasing likelihood of implementation is clearly unsettling markets. So far, and including US actions against the EU and other trading partners, and retaliations from those partners (for instance on steel & aluminium), the imports affected by tariffs total c.$150bn. When accounting for additional threatened tariffs and retaliations, the total amount of trade affected could reach close to $1trn (around 1.2% of global GDP, and 5.8% of global trade), although that is not our baseline scenario.
However, not all tariffs are equal, and it is important to look not just at value of imports targeted, but also the tariff rate. For the initial rounds of US tariffs and retaliations, the rate has ranged from 20-30%, which is significant, although not necessarily prohibitive. For the much larger sums threatened more recently – those affecting $200-400bn of Chinese imports – the tariff proposed is just 10%. Such a small tariff rate could be easily accommodated by currency moves alone. The CNY has already depreciated 6.5% vs the USD from its recent peak at the end of March, which would offset much of the proposed 10% tariff. Indeed, when factoring in FX moves, the combination of retaliatory tariffs and a stronger USD could – ironically – make President Trump’s combative trade policy more punishing for US exporters than for those of the US’s trade partners.
All told, we continue to think the direct effect of trade tariffs will be relatively small. The real danger is that it significantly dampens business confidence, thereby delaying investments and becoming a drag on growth. So far, we see some signs of this in Europe, and to a lesser extent in China. However, business confidence in the US looks unscathed so far – beyond anecdotal reports via Fed officials and business surveys. However, this is an area we should monitor closely in the coming months. Should business confidence decline significantly, this would likely be enough to put Fed rate hikes on the back burner, and perhaps for easier policy to stay in place for longer in Europe and elsewhere. (Bill Diviney)
China Macro: Downside risk from trade war rises, as stakes are being raised – Financial markets had just recovered from the first round of tariffs, but were impacted again when the second round was announced. Asian stock markets corrected, there was renewed pressure on the CNY and other Asian FX and commodity prices were hit as well. These market reactions highlight the fact that downside risks are rising for the Chinese and other Asian economies, now that the trade war is escalating. The total USD 250bn involved now correspond to almost 50% of Chinese exports to the USD in 2017, 12% of total Chinese exports and 2% of Chinese GDP. These numbers may even add up to more significant levels should the US come with a third round of another 10% over USD200 bn, in case of another Chinese retaliation. That said, as mentioned above, we do not think a 10% tariff is really prohibitive. Meanwhile, to match the latest US actions, China would have to implement 25% import tariffs on its remaining imports from the US. However, China has more ways to retaliate, such as stepping up non-tariff barriers or redirect imports, as it has done in previous trade disputes. We think China will be much more cautious with selling US Treasuries or allowing a sharp CNY depreciation versus USD, despite the 6% weakening since April (following an appreciation trend versus USD of one and a half years). For more background, please see our China Watch: China-US trade war escalates published earlier today. (Arjen van Dijkhuizen)