On the Trade War Battlefield – By Colin Vella

Perhaps not all of us Europeans are big fans of Twitter, and most might be more attached to other social media platforms such as Facebook and Instagram; however, certain tweets cannot go by unnoticed. Up to a week ago, financial markets were rather serene, having witnessed strong returns since the beginning of 2019 on the back of two main factors – more accommodative Central banks stance (both in the United States and in Europe) as well as improved hopes that the United States (US) and China are finally nearing some form of a trade deal. BUT, last Sunday’s tweet by the President of the world’s largest economy, has led to serious doubts by many as to whether the much anticipated deal will ever be reached.

By mid-week, Sunday’s tweet by Trump threatening to raise tariffs further from 10% to 25% on $200 billion worth of Chinese goods by Friday, rattled financial markets up to a point were just under $2 trillion had been wiped out from global markets. Moreover, Trump also threatened to impose a further 25% levy on an additional $325 billion worth of Chinese goods shortly.

Let’s recapitulate were all this retaliation between the world’s two largest economies started. It was back in 2017 when the US started looking into some depth the Chinese trade policies, and looking at the numbers, the trade deficit between the two did not amuse Trump. As a result, the US proceeded with the introduction of new tariffs on a number of Chinese products, worth billions, and Beijing retaliating by also increasing tariffs on the US. This led to the beginning of the trade-war that had a major influence into the direction that markets took throughout most of 2018 and 2019 so far.

For the past 10 months or so, China has already been paying 10% on $200 billion on various goods, and 25% on $50 billion of high tech items. According to official data by the US census, items classified as “Computers and Electronics” and “Electrical Equipment” by far accounted for a significant portion (over 40%) out of the $539 billion in imported goods from China in 2018. And, to put things into perspective and perhaps understand why Trump initiated this war in the first place, the US exported just over $120 billion in US goods to China in 2018. That obviously amounts to a huge discrepancy (trade deficit) in favour of China, which Trump is eagerly trying to narrow going forward.

Thus, in theory, Trump choosing to increase tariffs on Chinese goods should make imported goods more expensive for consumers, and as a result consumers will choose to purchase American made goods instead of imported Chinese goods. Just by reading the data, the value of imports of Chinese goods into the US has steadily declined since October 2018, falling from $52.2 billion at the beginning on the 4th quarter of 2018, to “only” $33.2 billion in February of 2019.

Consequently, firms from both economies stated that their profits have taken a hit, with investors fearing that further escalations in tariffs and the fact that a deal is looking less likely to happen, weakening the overall global economy.

At the time of writing, negotiators from both ends were preparing to meet up in Washington on Thursday to potentially try and find an eleventh-hour solution to this trade-war saga – the outcome of which will be eagerly expected by most, putting financial markets on edge. Any negative surprises going forward will likely exacerbate downside risk, and one should not exclude the possibility of experiencing a déjà vu of what we have already witnessed in the second part of 2018. And, although tariffs increased automatically from 10% to 25% on midnight Thursday in Washington, China’s commerce ministry still expressed some optimism that some form of negotiated settlement will eventually be reached. Meanwhile, on the fixed-income side, the US Treasury yield curve has inverted once again, with yields on the 10-year notes falling below the 3-month bill yield for the first time since March.

Should China respond back by raising the current 7% levy imposed on $60 billion US goods up to 15%, analyses conducted by Morgan Stanley suggests that the impact on US GDP could be that of 0.1 percentage point. On the other hand, should the US proceed with the hiking of tariffs from 10% to 25% on Chinese goods, that could have substantial impact on both consumer confidence and US companies’ earnings growth potential – subject to how much of the increased cost (on imported materials) will be absorbed by the companies as opposed to higher price tags to customers.

Other market participants, nevertheless, do believe that the overall impact on the broader market should be subdued. I am personally of the opinion that should the retaliations between the two economies intensify, uncertainty will prevail, and even if actual impact on the global market might result to be rather insignificant, it won’t be portrayed well by most market participants – at least over the short-term.

The truth of the matter is that China has more at stake given its $400 billion+ trade surplus with the US, making it much more vulnerable to any tariffs imposed. According to UBS bank, the 25% tariff hike could hamper China’s growth over the coming 12 months by some two percentage points. Thus, it is perhaps understandable and expected for China to want to avoid a full-blown trade war. That would not only mitigate the damage portrayed on China itself, but also lessening to some extent a much worse scenario for the broader global economy.


This article was prepared by Colin Vella, CFA, Head of Wealth Management at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]


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