Chief Investment Strategist
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There is great uncertainty around the US’s aims in its trade war with China
The year of the tax cut has been followed by the year of the trade war. Global investors shouldn't forget that both were promised goals of US candidate Trump prior to his election in November 2016. Observers can only guess if escalating tariffs, most reminiscent of the 1930s, can really be used to knock down impediments to “free and fair” international trade, or will instead backfire.
Understanding US aims alone is a challenge. If intellectual property protections in China and other inhibitors to Chinese imports are the central goal for "free and reciprocal trade" – a goal shared by others - then US officials might not have called out European auto imports as a potential "national security" threat. They likely would not discuss increased tariffs on allied nations’ imports as revenue sources.
With new tariffs on Chinese imports set to begin next week, rallying financial markets today have priced a glimmer of hope in the US's approach. The Trump administration has begun with a 10% tariff rate on the additional $200 billion in Chinese imports, giving the Chinese side a bit of time to avoid a rise to 25%. This and other steps suggests a pressure campaign to strike a deal rather than "acclimation" to permanent tariffs and reduced economic ties with China. (This has also been termed “giving time for US importers to find alternative suppliers.”)
While, the US trade aims are less than certain, they could vary for different trading partners. As we reduced global equity allocations in July to better reflect the trade policy uncertainty, we noted that a trade war fought to lower barriers implies a very different growth and inflation equilibrium for the US than a trade war fought to protect domestic industries.
The US has added 12 million jobs since the economic peak of 2007. The US has seen unemployment drop to less than 4% in recent years “despite” a large trade deficit. In fact, faster US growth and budget deficits (which create demand not supply) quite ordinarily cause a rise in demand for imports.
The US cannot produce all it consumes any more than individual workers could fashion their own vehicles to drive to work. The variety of goods and services available to US consumers in competitive markets is likely an undervalued asset that may see deterioration in a trade war. We acknowledge that economists go too far in arguing that trade discrimination has "no impact" on macro-level measures of bi-lateral trade. Still, it is observably false to assume that smaller trade deficits would result in a larger economy with guaranteed gains for labor.