During the 2016 Presidential election campaign, Donald Trump’s protectionist rhetoric served him well across traditionally Democrat-friendly industrial States. Once in office, and to the relief of investors and analysts, President Trump refrained from making any major protectionist announcements during his first 12 months. Since February 2018, the President has returned to his campaign persona and made announcements in rapid succession. Yet amid the bluster and furor, recent developments suggest that a more carefully though-out strategy may be unfolding.
Last spring, the US administration appeared to be embarking on a scattergun protectionist policy that targeted China, Europe, Japan and neighbouring countries Canada and Mexico. By summer, however, agreements had been struck with the EU, Mexico and, most recently, Canada. In contrast, threats of trade war measures against China were indeed carried out and, in the months ahead, all Chinese goods imported into the US will be very probably be subject to higher tariffs.
Without going into the detail of the agreements, noteworthy is how frequently World Trade Organization (WTO) reforms have been mentioned. Reform measures such as reinforcing the fight against intellectual property theft clearly indicate a desire to make the WTO more effective against China. It would seem, therefore, that the most likely scenario for the coming months is an essentially Sino-US trade war, rather than a series of indiscriminate US threats. That said, nothing is ever certain with President Trump and his threat to raise car tariffs still looms.
China’s response has been to raise customs duties on US imports while proposing to reduce them on imports from the rest of the world. At a time when China is dealing with a slowdown in domestic infrastructure spending, a potential slowdown in exports due to customs duties has prompted the authorities to take fresh measures to underpin growth. The most recent was the People’s Bank of China announcement on 7 October to cut the reserve requirement ratio by 100 basis points.
The IMF’s October 2018 World Economic Outlook deals extensively with the impact of the trade war. In a primarily Sino-US trade war scenario, in which the US raises duties to 25% on all Chinese imports and China retaliates, the direct economic impact on China would be severe (1.1 percent of GDP in 2019), whereas for the US it would be considerably less (0.2 percent of GDP in 2019). Only an ensuing confidence crisis together with a financial shock would lead to a dramatic slowdown in global growth (-0.8 percent of global GDP compared with a direct impact of -0.2 percent from a contained Sino-US trade war).
As with the situation in Italy, the subject heightens uncertainty and its market impact requires close monitoring. And with Donald Trump now accusing China of interfering in the midterm elections currently underway in the States, political tension looks unlikely to ease.
Julien-Pierre Nouen, CFA
Chief Economist and Head of Multi-Asset Investment
Matthieu Grouès
Head of Institutional Management, Strategy and Asset Allocation
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