This week TAMIM Director Darren Katz takes a look at the potential trade war brewing. Will it really be Donald Trump vs. the World or is it all talk?
Australia woke to horrific news on Sunday morning. No we did not get a delayed news feed that the US Markets had suffered their worst week since 2016 with a 5% fall over 2 days. It was way worse, the Australian cricket team had been ball tampering and the leadership team including Steve Smith and David Warner were complicit. Trade Wars all of a sudden became insignificant, this was a national crisis resulting in the Prime Minister weighing in and the standing down of Smith and Warner. Strangely enough South African skipper Faf Du Plessis had been caught and “convicted” of ball tampering during the Hobart 2016 test. Is this just another case of “trade wars”, all of the national teams, if you read cricket biographies, engage in the illicit craft of ball reorganisation. With the South African series embroiled in controversy was this a perfect opportunity to tit for Faf’s tat? Interestingly as the Balmy Army was quick to point out, this disgraceful incident distracted our attention from the true cricket news that England had been bowled out for 58 runs by New Zealand.
So do Steve Smith, David Warner and Donald Trump have more in common than meets the eye? And before you jump to conclusions, I am not referring to Trump's relationship with Stormy Daniels. This week Trump announced the long awaited US trade and investment measures against China. China will feel compelled to act in kind which may cause further US retaliation. In the end however the need to minimise the domestic fallout of these policies will restrain the White House. Like Steve Smith, Trump is changing the rules of engagement to get the outcomes to move more favourably in his (the United states) direction?
In March, the Office of the US Trade Representative concluded its seven month investigation under Section 301 of the Trade Act of 1974. This lead to Trump's 22nd March announcement of measures in response to China's intellectual property policies. Trump’s measures will result in tariffs on Chinese goods and cases against China in the World Trade Organisation.
The Rough Side of the ball
Trump plans to levy a 25 percent tariff on approximately 1,300 Chinese goods. It is likely this will be in sectors where the Americans believe the Chinese have engaged in forced technology transfers such as information technology, robotics, high-tech medicine and health care. Robert Lighthizer, the U.S. Trade Representative, will publish the list of the goods targeted under the new tariffs, he has indicated these goods will be chosen in a manner that will have the least effect on the US consumer. The list will have some time for adjustment through a comment period but post this, the list will be finalised and the tariffs will move into effect. Trump will also pursue complaints against China in the World Trade Organisation as well as look to restrict Chinese investors in the US tech sector.
The Smooth Side
China is not expected to take these measures lying down. The US exported $130.3 billion worth of goods to China in 2017. The Chinese authorities will try to hit Trump where it hurts most in his supporter base. China has already opened an investigation into alleged U.S. farm subsidies for sorghum production which is a major industry in the Republican strongholds of Kansas and Texas. It is likely to target other agricultural exports, including pork and soybeans. Finally, there have been reports that Beijing may drop aircraft orders from U.S. aerospace firm Boeing Co. in favor of France's Airbus.
We do not believe this will lead to a trade war. In fact, the normal course of trade negotiations is for some form of retaliation and this generally signals movement towards resolution of the issue as both sides understand the ultimate damage that trade restrictions will cause and they move towards a truce of sorts. The big question this time round is has Trump engaged in ball tampering and changed the outcomes to his favour. We continue to believe that Trumps public posturing and bombastic rhetoric causes everyone to believe he is irrational. People therefore believe he may do something out of the bounds of reason and this changes the rules of the game to his favour.
Trump continues to push the public line that the United States could "win" a trade war with any of its partners because it imports more than it exports. In March, the White House announced wide-ranging tariffs on steel and aluminum imports, when threatened by the EU, Trump strongly signaled his intent to retaliate. However if you look below the surface, the US has already granted exemptions to the metal tariffs to the European Union, Canada, Mexico, Brazil, Australia, New Zealand and South Korea (countries that together accounted for about two-thirds of U.S. steel imports in 2017).
Given his track record, Trump will publicly signal a tough line against China. He has already started, in his news conference he indicated that the tariff’s were just the start of his administration's actions on China. All eyes will then be on China to understand their course of action. The reality is that the new tariffs will not damage the Chinese economy, the tariffs total value represents only about 2.5 percent of China's overall exports to the United States. It is therefore likely that China while they will make a public noise will not want to engage with the US.
Interestingly, it would seem the trade war that all market participants fear will ultimately result in nothing of substance. Publically, it has allowed Trump to beat his chest and make himself out to be the man who will make America great again. What it has allowed him to achieve is that it has allowed him to serve notice to the Chinese that their technology transfers will no longer be tolerated. From an investment perspective, the volatility created simply provides us with the opportunity to buy companies we have liked for a long time at significantly lower prices.
Markets & Commentary
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