Mark Williams

Damaging ‘trade war’ still looks unlikely

Mark Williams

We had hoped that Trump would not implement trade tariffs, but there was always a risk that he would play to a domestic audience as we move towards America’s mid-term elections in November. While events unfold, the direct impact on the Liontrust Asia Income Fund of the US tariffs announced last week should not be excessive unless they are allowed to escalate further; at this stage they could affect 2.5% of China’s total exports and 0.4% of its GDP. In the current environment we continue to view regional market volatility resulting from trade war fears as a potential source of investment opportunities.

We do acknowledge that risks have risen, however. We are dealing with a relatively inexperienced leader in Trump, and his recent appointments – Mike Pompeo as Secretary of State and John Bolton as national security adviser – are more pugnacious than their predecessors. As a result the chances of bad trade policies have risen, but we continue to believe that market volatility will exceed actual significant economic impact.

The backdrop is that on 22 March, the US announced a tariff plan on US$50-60bn of annual hi-tech imports from China (of US$506bn total Chinese exports to the US in 2017).

A detailed list of these products is to be announced within 15 days, to be followed by a 30 day consultation period. The list will reportedly cover 1,300 products in aeronautics, modern rail, new energy vehicles and high-tech products, with tariff rates of up to 25%. The US has also indicated it will limit inward Chinese investments and file a protest with the World Trade Organisation regarding technology licensing in China.

China’s initial retaliation to this has been measured and need not necessarily goad Trump into further action. It has placed tariffs on US$3bn of products that it currently imports from the US, targeting steel, aluminium and agricultural products.

These tariffs announced so far by both parties will have little impact. The key will be whether there is escalation from here. Our base case remains that things will not be allowed to escalate to levels that are overly detrimental to the countries involved.

As we outlined in our previous update, China is relatively well-placed to navigate a trade dispute, and hopefully the leadership will see the value in some strategic concessions rather than seeking aggressive reprisals. It already has a history of making minor concessions to the current US administration rather than encourage a trade war. There are already some signs that these may be accelerated or extended as a result of the US’s measures.

And we believe that some of these are needed for fairness. We would like to see China open up its services sector such as healthcare, education and finance to foreigners. It could also address US concerns on technology transfers and entry barriers. These all seem to be reasonable appeasements to make, as currently the rules are unjustly in China’s favour.

There is also a chance that the final list of US targeted products will not be as broad in scope as initially indicated. The reduction (via exemptions) that we saw with Trump’s earlier steel tariffs may be repeated as negotiations (and attached lobbying) to select impacted products take place. China’s trade deficit with the US was almost US$36bn last month and rising, which makes it seem unlikely that the underlying imbalances will be addressed swiftly. As they persist they will remain a potential source of angst for investors (and Presidents), but so far it is not enough to cause us to change our views.

November 2017 – President Xi Jinping offered a US$250bn business deal to President Trump during his visit to Beijing; January 2018 – Vice Premier Liu He, China’s top economic policy maker, began his speech in Davos by offering to further open up the services sector and property rights protection; March 2018 – Premier Li Keqiang said that China will protect intellectual property rights and abandon the policy of ‘voluntary’ technology transfers.

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Wednesday, March 28, 2018, 10:14 AM