Asset Class: International Equities

Doubling down on protectionism

China U.S. trade war banner

It is distressing that since we last commented on the Trump initiatives they have been ramped up even further. As we write, a further U.S. $200 billion of Chinese exports will be subject to tariffs on top of an existing $50 billion. This is equivalent to approximately half the value of goods imported by the U.S. from China in 2017.

Mr. Trump is employing his infamous “doubling down” tactic. He has threatened to add another $260 billion to the list, taking coverage to virtually all Chinese exports to the U.S. The Chinese have retaliated by slapping tariffs on $110 billion of U.S. goods. Mr. Trump is backing up his election promises and his support base duly engages in enthusiastic cheering.

We do not. Protectionism never works for the greater good. In today’s interconnected world with global supply chains it has even less chance of working than in the past. Costs will rise, growth will slow. In its latest interim economic outlook, the OECD reports that the U.S. initiatives have “…already resulted in marked changes in trade flows…policy announcements have also adversely affected business sentiment and investment plans, reflecting uncertainty about the possible disruption to supply chains and the risk that restrictions may intensify.”

Our view has been that this stoush fundamentally relates to Intellectual Property, which the U.S. claims the Chinese have been stealing for years (with justification), but it has now morphed into a far broader fight. Perhaps the Trump tactic will work and a meaningful set of negotiations will soon commence and cool heads will prevail. Or perhaps not.

China re-invented the word “long” in the expression “long-term” view and will wait Mr. Trump out if necessary. Xi Jinping has no elections to worry about – ever. China’s aggressive expansion in the South China Sea, Africa and elsewhere should be weighing more heavily on Mr. Trump’s plate than these trade issues.

 

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