RFi Group Insight - Asia: All’s fair in love and (a trade) war

The recent political tension between US and China have sparked speculations of a trade war. However, it is unlikely that both countries are willing to put all on the line and engage in one. The cost is too high despite what country leaders are saying. And one must also look beneath the surface level of a threat and at underlying political intent. Despite the strong investor confidence moving into 2018, the political tension would spill over into consumer outlook. The potential for a trade war would undoubtedly shake investor confidence in the US and China-based holdings.

In a declaration that cheap global steel imports were a threat to the national security of the United States, U.S president Donald Trump signed a proclamation on the 8th of March to impose a 25% tariff on steel imports and a 10% tariff on imported aluminium. The tariffs were supposedly targeted at China, with the intent to curb apparent unfair export policies. However, China only accounts for 2% of US steel imports. The international response to the import tax was as one would have imagined.

Foreign governments and economists decried the tariffs, citing the ineffectiveness of the steel tariffs imposed by George W. Bush back in 2002. The Trump administration sought to soften the blow by exempting its regional allies and largest steel importers Canada and Mexico from the tariffs. Strategic trading allies were also given special inclusive options to soften the blow.

In a subsequent statement, President Donald Trump announced a further $50 billion tariff on Chinese imports on the grounds of China breaching US intellectual property. The double blow to Chinese imports was met with China imposing its own $3 billion tariffs on American products. Many feared the start of a trade war between China and the United States.

The repercussions of a trade war would have rippling global effects that would inevitably destabilize the global economy. History has shown that trade wars have a detrimental impact on the global economy. The signing of the Smoot-Hawley Act in 1930 by the President of the United States Herbert Hoover, resulted in countries retaliating by imposing their own import tax. International trade halved in value, aggravating the effects of the Great Depression. While the economic circumstances and focus of the tariffs were different, the message holds true to this day. Trade wars have no winners.

To grasp the eventual outcome, it is necessary to untangle the gloomy rhetoric driven by the media and reframe the tariffs and trade war as a political tool used to negotiate trade terms. Both the United States and China have too much to lose. Officials from the two sides have gone on record explicitly stating they have no intention of escalating into a trade war and that multilateral cooperation is key for both.

The good news is that, after the bravado and one-upmanship displayed by both parties, China has expedited its plan of opening its economy and trade policies. This addresses many of the accusations of intellectual property infringement made by the West. The easing of trade tension between the two superpowers rippled through Asian markets with renewed equity market growth. A good example of markets having renewed confidence can be seen in the rally of the Shanghai Stock Exchange Composite Index (SSE Composite Index) rising on the 9th of April, following China’s announcement of agreeing to open its economy. It closed highest since the announcement of the US imposed tariffs on the 22nd of March.

While it is too soon to capture consumer sentiment on the tariffs/ potential trade war, RFi data from FY2017 seem to indicate that consumers were generally bullish entering 2018. Figure 2 illustrates a relatively stable rate of concern over the US economy across the Asian markets. However, the proportion of consumers who were concerned (score of 4 or 5 out of 5) remained fairly high. China, on one hand, had only 36% of consumers indicating that they were concerned about the state of the US economy.

This might indicate a sentiment of less reliance on the US. On the other hand, markets that are more exposed to global trade/ investment flows like Singapore and Hong Kong had close to 50% of consumers indicating concern over the US economy. It is likely that these markets would be more affected by the imposed tariffs and possible trade war.

Should the worst-case scenario occur, and a trade war does ignite, it would be likely that investors would migrate to safer investment assets like bonds or gold as seen at the end of March. Additionally, there are pockets of international markets that might stand to benefit from a hypothetical trade war between the US and China. It is likely that countries that export substitute goods to the US and China would see an increase in demand in the short to the mid-term.

Latin American markets like Brazil, one of the world’s top exporter of soybeans, would stand to gain as China might be forced to seek alternative sources of soybean imports. While gains in the short run might be possible, global trade would ultimately shrink in value. The long-term view is that losses will occur on all fronts.

For as much as Trump would like the tariffs to happen in a “loving way”, it is in the best interest of everyone to avoid tariffs and a trade war. The unlikely event of one might even have more extreme consequences given how interdependent and connected 21st-century economies are.

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