Trade war looms as greatest threat to prosperity since GFC
The humble washing machine does not often get associated with major international events, but along with solar panels it was used in the first salvo of a war that now is the greatest threat to world economic growth since the global financial crisis (GFC) of 2008.
Trade wars erupted between China and the US in January last year when US President Donald Trump announced tariffs on washing machines and solar panels imported from China. He ratcheted up the war a month later by imposing tariffs on all imported aluminium and steel and has continued to talk up tariffs as a way of rebooting US manufacturing, create jobs and redress the trade balance with key partners, particularly Europe, Mexico and China. It is a theme he has been espousing since the 1980’s and used in his election campaign to win the 2016 US presidential elections.
In the latest trade wars escalation as we moved into Spring the US began imposing 15 per cent tariffs on more than $US125 billion of Chinese goods from footwear to smart watches and China retaliated by imposing a 5 per cent duty on US crude oil.
The impacts are real but still being calculated
The impact from trade wars across the globe has not been confined to the political sphere and has had a real impact not just on financial markets but also domestic economies. Most of the effects have been negative, like Japanese media reporting earlier this month that corporate profits plunged 12 per cent in April-June due to the escalating US-China trade war. Wheat farmers in the US state of Montana and soya bean farmers in Missouri have also blamed trade wars for stagnant profits while an airline conference in Seoul in South Korea heard global profits were well down on expectations due to lower freight movements and higher fuel costs. The impacts are global and as yet, uncalculated.
But there has been some benefiting like Vietnam getting more Chinese firms setting up manufacturing bases there and more garment purchases from the US. Garlic farmers in the US have also received better domestic prices. A major competitor to Australia in selling agricultural products to China is America, so there are potential opportunities for Australian farmers.
Trade war could be the next black swan event
While impacts of the US-China trade war to date have been relatively contained Citi economists have estimated the disruption caused and potential escalation of US-Europe tensions could halve forecast global growth from 2 per cent to 1 per cent in 2020 and create a slowdown in the order of the GFC.
Certainly, we expect trade and the rhetoric accompanying negotiations and the public debate will be the most important market influencer for the remainder of this year and next.
Australia, which was mostly isolated from the initial effects of the trade war due to its low input into the global manufacturing supply chain, is facing a major impact to its international competitiveness if the trade war drive protectionism in key markets.
Last month Federal Reserve Bank of Australia deputy governor, Guy Debelle, said at a conference that: ““Australia has been a major beneficiary from the rules-based global trading system over many decades. The current threats to that is clearly a major risk for the Australian outlook over a longer horizon.”
While the potential impacts of the trade war have started to be telegraphed to the general population through mainstream media, initially both markets and many commentators were slow to attribute the escalation of trade wars to a serious threat to global growth.
There is the potential for matters to get a lot worse.
1) Further escalations could see the US continue to increase tariffs in response to the Chinese Yuan continuing to depreciate – as it offsets the impacts of tariffs by making Chinese exported good cheaper and US products in China more expensive.
2) China bans rare earth imports to US. Rare earths are used in smartphone and high-technology appliances like flat screen TV’s.
3) President Trump invokes his nuclear option and invokes the International Emergency Economic Power Act (IEEPA) and declares a “state of national emergency”. The last action would send markets into a tailspin as it could include restricting or taxing Chinese US assets and restricting China’s access to US financial markets.
We view invoking IEEPA powers as the most extreme extension of the trade war and its use would likely have wide-ranging and unanticipated consequences. Stepping back from extreme measure Citi anticipates there is a 60 per cent chance of no resolution of the trade issues before the 2020 US presidential election, although that falls to 40 per cent if President Trump’s chances of re-election are impacted by a noticeable negative impact of the US economy and jobs from the trade war.
Given the continued uncertainty from the trade war, wealthy investors continue to explore income focused investments such high-quality corporate bonds and equity linked investments that focus on resilient corporate balance sheets and investments that can offer stable income in rising, flat and moderately declining markets.
Damon is the content editor for Citi
The humble washing machine does not often get associated with major international events, but along with solar panels it was used in the first salvo of a war that now is the greatest threat to world economic growth since the global financial crisis (GFC) of 2008.
Trade wars erupted between China and the US in January last year when US President Donald Trump announced tariffs on washing machines and solar panels imported from China. He ratcheted up the war a month later by imposing tariffs on all imported aluminium and steel and has continued to talk up tariffs as a way of rebooting US manufacturing, create jobs and redress the trade balance with key partners, particularly Europe, Mexico and China. It is a theme he has been espousing since the 1980’s and used in his election campaign to win the 2016 US presidential elections.
In the latest trade wars escalation as we moved into Spring the US began imposing 15 per cent tariffs on more than $US125 billion of Chinese goods from footwear to smart watches and China retaliated by imposing a 5 per cent duty on US crude oil.
The impacts are real but still being calculated
The impact from trade wars across the globe has not been confined to the political sphere and has had a real impact not just on financial markets but also domestic economies. Most of the effects have been negative, like Japanese media reporting earlier this month that corporate profits plunged 12 per cent in April-June due to the escalating US-China trade war. Wheat farmers in the US state of Montana and soya bean farmers in Missouri have also blamed trade wars for stagnant profits while an airline conference in Seoul in South Korea heard global profits were well down on expectations due to lower freight movements and higher fuel costs. The impacts are global and as yet, uncalculated.
But there has been some benefiting like Vietnam getting more Chinese firms setting up manufacturing bases there and more garment purchases from the US. Garlic farmers in the US have also received better domestic prices. A major competitor to Australia in selling agricultural products to China is America, so there are potential opportunities for Australian farmers.
Trade war could be the next black swan event
While impacts of the US-China trade war to date have been relatively contained Citi economists have estimated the disruption caused and potential escalation of US-Europe tensions could halve forecast global growth from 2 per cent to 1 per cent in 2020 and create a slowdown in the order of the GFC.
Certainly, we expect trade and the rhetoric accompanying negotiations and the public debate will be the most important market influencer for the remainder of this year and next.
Australia, which was mostly isolated from the initial effects of the trade war due to its low input into the global manufacturing supply chain, is facing a major impact to its international competitiveness if the trade war drive protectionism in key markets.
Last month Federal Reserve Bank of Australia deputy governor, Guy Debelle, said at a conference that: ““Australia has been a major beneficiary from the rules-based global trading system over many decades. The current threats to that is clearly a major risk for the Australian outlook over a longer horizon.”
While the potential impacts of the trade war have started to be telegraphed to the general population through mainstream media, initially both markets and many commentators were slow to attribute the escalation of trade wars to a serious threat to global growth.
There is the potential for matters to get a lot worse.
1) Further escalations could see the US continue to increase tariffs in response to the Chinese Yuan continuing to depreciate – as it offsets the impacts of tariffs by making Chinese exported good cheaper and US products in China more expensive.
2) China bans rare earth imports to US. Rare earths are used in smartphone and high-technology appliances like flat screen TV’s.
3) President Trump invokes his nuclear option and invokes the International Emergency Economic Power Act (IEEPA) and declares a “state of national emergency”. The last action would send markets into a tailspin as it could include restricting or taxing Chinese US assets and restricting China’s access to US financial markets.
We view invoking IEEPA powers as the most extreme extension of the trade war and its use would likely have wide-ranging and unanticipated consequences. Stepping back from extreme measure Citi anticipates there is a 60 per cent chance of no resolution of the trade issues before the 2020 US presidential election, although that falls to 40 per cent if President Trump’s chances of re-election are impacted by a noticeable negative impact of the US economy and jobs from the trade war.
Given the continued uncertainty from the trade war, wealthy investors continue to explore income focused investments such high-quality corporate bonds and equity linked investments that focus on resilient corporate balance sheets and investments that can offer stable income in rising, flat and moderately declining markets.
Damon is the content editor for Citi