There’s been a further escalation in the trade war between the US and China with new tariffs coming into effect on September 1.
This follows the breakdown in trade talks between the two countries in May and consequently President Trump announced new tariffs on China early in August. More recently the situation escalated as China retaliated, and the US then retaliated and so on.
Ultimately our view is that some sort of deal will still be reached because the problem with these tariffs is that as they're ramped up they’re having a negative effect on confidence.
This impact has not really hit consumers in the US and globally yet, as while tariff rates have gone up they haven’t been that onerous, but if they continue they will have more of an impact on consumers, and on products such as electronic goods coming into the US.
So far most of the impact of the trade war has been contained to businesses and business are upset because it is resulting in uncertainty.
They don’t know where to source materials or goods from, where to locate factories, and it has upset their supply chains.
That’s been the main impact of the tariffs in the US so far and there’s been a decline in business confidence and a decline in business investment, and likewise we’ve seen a decline in the Chinese economy and their exports to the US so it is beginning to have a negative impact.
Edging closer to a deal?
Recently share markets have been down and President Trump has been on the phone to China again, talking about making a deal with new talks scheduled for later in September.
Given the escalations it will be harder to reach a deal because trust has been broken by both sides.
But while it may be taking longer, ultimately we think a deal will be reached because President Trump wants to be re-elected next year and he may struggle to get re-elected if he lets the US economy slide into recession.
Investors should expect more volatility and falls in share markets along the way but once a deal is reached and central banks around the world ease up on monetary policy that should help share markets on a 6-12 month time horizon.
Subscribe to Oliver Insights to receive my latest articles straight to your inboxDr Shane Oliver, Head of Investment Strategy and Chief Economist
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