The tail risk is an escalation in tit-for-tat tariffs between the US and China, that leads to a full-blown trade war.
If Trump is applying his ‘Art of the deal’ to trade, then we are likely to see a negotiated settlement. While neither wants to lose face, the objective here is not imposing tariffs, but rather to increase leverage in negotiations.
China’s modest response has been to target mainly agricultural goods. However, there are further measures available to China that could be deployed in the event of any further escalation.
Although the US imports far more from China than it exports (a negative trade balance), more US companies would be hurt by a trade war than helped. Industries most negatively impacted include aircraft, autos, agriculture, semiconductors, and chemicals. Industries that would be most positively impacted include steel, aluminum, telecommunications equipment, furniture, and textiles.
Right now, the proposed tariffs are quite targeted. The tail risk is a further extension of tariffs to broader categories of products. The most direct impact of trade tariffs will likely be a slowing down of global trade activity, with negative consequences on global economic growth. China’s significant participation in global supply chains (and interconnectivity of global supply chains more broadly) means that the impact of tariffs would be dispersed beyond goods produced solely in China. This disruption would raise prices for consumers worldwide.
However, the impact of a potential trade war will not be uniform across regions, sectors and themes within equity markets. There will be winners and losers. For example, companies in cyclical sectors, such as miners, energy and industrials; as well as technology (semi-conductors, high tech) are likely to suffer the brunt of the impact. Countries open to trade - Asian manufacturers (especially those who supply components to China, to make products that are then exported the US) and German exporters (autos). Stocks deriving a large portion of their revenues from abroad would suffer more than domestically oriented companies. In such a market environment, being selective and active will be key.
Ritu Vohora - Investment Director - M&G Investments