The US vs China: An unlikely trade war

The Trump administration’s proposed tariffs on US$60bn of Chinese imports and China’s subsequent announcement of retaliatory tariffs on US imports have unnerved many investors. However, from our perspective, while a full-blown trade war would be significantly negative for equities on both sides of the Pacific, we believe such a scenario is unlikely.

We have repeatedly seen that Trump’s ‘bark is worse than his bite’. On a number of occasions, the Trump administration has chosen to begin negotiations from an apparently extreme position, perhaps to gain as much bargaining power as possible, before ultimately agreeing upon a middle-ground. Just over a year ago, investors were taking Trump at his word and considered it quite probable that the US would abandon NAFTA (North American Free Trade Agreement). Today, most would agree that the likely outcome of US-Mexico-Canada trade talks is simply a set of minor updates to the 24-year-old trade agreement.

Rather than economic enemies, it appears that trade relations between the US and China are in better shape than the rhetoric and recent policy announcements suggest, not only because of what we have so far observed in the example of NAFTA, but also because Chinese leaders and officials began offering potential concessions to the US and other major economies well ahead of last week’s headline-grabbing announcements. Earlier this year, Chinese Vice Premier, Liu He, suggested at Davos that China’s economy will become more open to goods and services from overseas and that rules would change so as to strengthen protection of overseas companies’ intellectual property. The latter point was reiterated by Premier Li Keqiang last week and it is developments such as these that allow both sides in the apparent US-China trade dispute to “save face” while avoiding the mutually detrimental impacts of an escalating trade war.

Ultimately, as is often the case of with Trump, the latest headlines concerning a US/China trade war overemphasise the worst-case scenario, and in my view as equity investors, we should avoid rash decisions in reaction to the negative news flow concerning global trade relations.