Any conversation I have had or press briefing I’ve attended with a wealth or asset manager over the last couple of weeks has inevitably featured a long discussion about the ongoing trade dispute between the US and China.
There is certainly plenty to talk about. And unlike that other headline-grabber Brexit, which is characterised by a sense of déjà vu and an apparent lack of progress, sentiment around the trade war seems to depend entirely around which side of bed President Trump gets out of each day.
Investors had been pricing in an eventual resolution to this trade spat, but it appears Mr Trump had other ideas. He took to Twitter announcing that the US was raising tariffs from 10 per cent up to 25 per cent on $200bn of Chinese goods. Markets tumbled, gold prices increased and oil prices fell. China vowed retaliation and cancelled vice premier Lui He’s trip to Washington for trade talks. It appears that the chances of a resolution remain elusive.
Winner takes it all?
Mr Trump may claim all of this as a great victory and part of his plan to “Make America Great Again”. It is his long held belief that imposing tariffs on foreign goods coming into the US will make billions for the country's economy, and that China, though not the only offender in his eyes, is certainly the worst.
There are undoubtedly issues with the world trade system, and China is a very different country than it was even a few years ago. But you would be hard pressed to find anyone else who agrees with him that all of this is a one way street and that the US only benefits from the chaos. Mr Trump may tweet about the “billions of dollars and moving jobs back to the USA”, and claim farmers and the steel industry are being reinvigorated by the imposed tariffs, or assert that “there is no reason for the U.S. Consumer to pay the Tariffs”, but even Larry Kudlow, the head of the president's National Economic Council, admitted to Fox News that “both sides will pay”.
Plenty of investors are worried about the impact this could have on the global economy. A full-scale trade war could see “global equities fall by some 15 to 20 per cent”, warns Luca Paolini, chief strategist of Pictet Asset Management, believing Wall Street more vulnerable than most stockmarkets, while “open economies” such as Singapore, Taiwan, Hungary and Ireland are “potentially more vulnerable than the US and China” to disruptions to trade.
Others believe that focusing on trade is missing the point, rather that the spat is a symptom of the wider changing relation between the world’s two largest economies.
Arno Lawrenz, global investment strategist at Ashburton Investments, believes the trade war is further evidence of China’s ascension. “It represents a vain attempt from the US to put a moat around its economic hegemony, which is under siege,” he says. Despite the moves, Mr Lawrenz expects China to become increasingly important to the global trade system and that this power dynamic between the two countries will shape the investment landscape for decades to come.
The trade discussion is the result of this multi-polar world, agrees Virginie Maisonneuve, CIO at Eastspring Investments, who believes the battle for hegemony in technology is one of the driving forces, as evidenced by President Trump’s recent declaration of a national emergency to protect US computer networks from "foreign adversaries", believed to be targeting Chinese company Huawei though it is not specifically named.
The deal between the two countries which appeared to have been struck was not tough enough for Mr Trump, says Ms Maisonneuve, and it was better politically for him to reject it and take a stronger stance. And she thinks ratcheting up the tensions is precisely what the US president wants.
“Volatility has played into Trump’s hands historically. It creates fear that some of the electorate feel Trump is better placed to deal with. So China must not create issues that create too much volatility as that might play into his hands, especially as the election nears.”
No need to panic
Yet no one seems to be panicking just yet. Eastspring sees “undue fear” as potentially creating buying opportunities, for example in Asian currencies, while Francois Savary, CIO at Prime Partners, sees “no reason to reduce your exposure to emerging assets”, though short-term volatility is to be expected.
The consensus remains that both sides will want to see a deal done, and that they will eventually achieve this. All eyes will be on the G20 meeting in June which seems to offer the best chance of a resolution. If that chance is missed, the dispute is likely to become a hot topic in the presidential election, where Mr Trump is likely to want to be seen as playing hardball. And that of course opens up the possibility of China waiting to see if there is a new administration in the White House before putting pen to paper.
The trade dispute may or may not be resolved in the coming weeks or months, but what is inevitable is that the relationship between China and the US is set to be one of the hot topics in discussions for decades to come, whether or not Mr Trump is in the hotseat. Things could well be less volatile under a different president, but China’s inexorable rise means tensions between the two countries are here to stay.
Elliot Smither is chief sub editor of Professional Wealth Management. Follow him on Twitter @ElliotSmither
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