Just when investors thought it was safe to go back in the water, the resumption of the US-China trade dispute and the renewed threat of wider trade wars are posing a renewed threat to bullish markets and confidence in a global recovery.
A key part of investors’ expectations of a resurgence in the global economy this year was linked to hopes of a positive outcome to the US-China trade dispute. However, President Donald Trump’s tweets a fortnight ago, threatening to escalate tariffs on Chinese imports put a big question mark over this assumption, and the implementation of that threat has crystallised many of those fears.
On May 10 the US hiked tariffs on $200 billion (Dh734.6bn) of Chinese imports to 25 per cent, as talks between the two countries ended without a resolution. The US also indicated it was preparing to introduce tariffs on another $300bn of imports from China, releasing a list of goods that could see tariffs of up to 25 per cent imposed by the end of June if no deal is reached by then. This would effectively cover all remaining Chinese exports to the US that are currently not being taxed and would likely push up the cost of many household goods for US consumers.
A few days later China retaliated announcing it would increase tariffs on $60bn worth of imports from the US from June 1, including on computers, agricultural products, liquefied natural gas and toothpaste. While President Trump said that he feels the trade talks will still be successful, the 4 per cent drop in the S&P 500 index in the last fortnight tells a different story. This does at least appear to be concentrating President Trump’s mind.
Amidst an escalation of trade wars with China, in which the telecom firm Huawei was specifically targeted as a national threat, Mr Trump deferred a decision on tariffs on EU and Japanese autos and spare parts by 180 days. The US government also reached an agreement with Canada and Mexico regarding tariffs on steel and aluminium imposed last year, showing that he does not want to fight trade battles on multiple fronts.
It is frequently observed that there are no winners in a trade war, but Mr Trump seems to view it as a matter of relative strength rather than a zero sum game, feeling emboldened in his stance on China trade by the recent record highs in the stock market, the 3.2 per cent headline growth in US GDP and the historic low unemployment rate in April of 3.6 per cent. His approval ratings are also around the highest seen during his presidency, which may all be giving him the impression that he has much less to lose.
There are numerous measures of the estimated cost of the trade dispute on consumers, on the US economy and on the broader world, with think-tanks, banks and global institutions all projecting their various scenarios of the hit to growth.
There is a risk, however, that such economic models do not pick up the full extent of the damage to business and consumer confidence and the impact on global supply chains, trade flows and investment. The bottom line is the latest twist in the trade dispute increases recession risks for most major economies.
Already, world trade volumes are contracting and the global composite PMI output index showed the global expansion slowing to a three-month low in April. New export business also fell for the fifth consecutive month, while in the US and China the latest retail sales and industrial production data were all soft. So, the outcome of the trade talks is clearly taking place at a critical moment for the world economy.
The next deadline for the trade talks now looks like the G20 Summit in Osaka at the end of June. Defining what will constitute a successful outcome is not clear however. The US-China trade dispute is likely to play out over the long term, becoming a process or framework where compliance and enforcement are the key elements. In the short term, equity markets will probably need to see a reduction in the 25 per cent tariff rate or some sort of partial withdrawal of such tariffs if investors are likely to feel brave enough to dive back in the water again.
Tim Fox is chief economist and head of research at Emirates NBD