Two weeks ago, US President Trump announced he was putting tariffs on Chinese exports to the sum of US$50 billion, escalating the so called ‘trade war’ between China and the United States. Dr Shane Oliver, Chief Economist, explains what this could mean for investors.
This year I’ve been talking a lot about many of the geopolitical risks investors should be keeping an eye out for, but at the same time I’ve also been careful to not emphasise the “fear” factor that might potentially spiral in investors’ minds.
The reason I’ve been downplaying fear is, while there will be bumps along the way – and there’s no doubt volatility will be a feature in financial markets this year – the emergence of global growth means there’s support for a rising trend longer term.
A good example of what’s happening in global markets at the moment supporting my view around keeping fear in check is the reaction to the so called “trade war” that’s escalated between China and the United States this week.
Firstly, as is the case with the series of geopolitical risks I’ve outlined, the trade wars between the US and China come as no surprise really.
Two weeks ago, US President Trump announced he was putting tariffs on Chinese exports to the sum of US$50 billion and the list published this week was an outcome of this.
Likewise, it was always known the Chinese would likely put pressure back on the US by publishing its own list, which it’s worth pointing out is just a series of proposals at this stage.
Let’s put these so called trade wars in context for a moment.
To do this you need to do the maths. Roughly 10 per cent of Chinese exports to the US are subject to a 25 per cent tariff and Chinese exports to the US are 15 per cent of total exports to the US. As a result, the average increase in tariffs to the US, including steel and aluminium, is less than 0.5 per cent. The last time tariffs were increased in the US in a big way was in 1971 under US President Nixon when tariffs were 10 per cent of all imports. In the 1930s tariffs were as much as 20 per cent.
So, in the great scheme of things, the economic impact on this latest round of tariffs from the US and China is actually trivial: less than a 0.1 per cent impact on GDP and 0.1 per cent impact on inflation.
The proposal in the US is now subject to public comment and there’s a hearing on May 15, so I expect it might be a while until this is implemented. I also expect there will be some noise in the run up to this as well which will likely mean more volatility.
But I don’t think we’ll have a trade war where things will escalate in the realm of the tariffs of 10 and 20 per cent in the 1970s and 1930s, even though there will be some more volatility before we’re out of this mess.In February the US share market had its big – circa 10 per cent – fall on the back of concerns about rising inflation but has since bounced back. Similarly, the local share market in Australia has been following the lead of the US. There have been sell offs in share markets as the so called trade wars have intensified, but this has not really tested investors’ resolve and prices have bounced back.
Fundamentally, you could argue the US share market probably might have more upside from here and might be able to resume that rising trend given the economic growth we are seeing.
Sure, it’s important for investors to be aware of these events because it will mean markets are volatile, but this year in my view it’s just as important to keep an eye on the longer term.
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