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Economics & Markets

Trade war escalates as new tariffs begin

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Sydney, Australia

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.

Consumer impacts

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.

Business impacts

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.

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Dr Shane Oliver, Head of Investment Strategy and Chief Economist
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

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