LGIM: Commentaar Tim Drayson op escalatie handelsoorlog

Aug 2, 2019

De belangrijkste punten:

• Trump has announced 10% tariffs on all remaining imports from China, effective 1 September. Before tariffs this would have affected about $300bn worth of goods. In practice it will be far less. Imports from China are already cratering (down 12% ytd) and will likely fall much further (see our forecast in grey in the chart below – a bigger collapse in trade between the two nations than during the financial crisis)
• The previous rounds of tariffs largely affected capital and intermediate goods and appear to have been partly absorbed in US supply chains
• This round of tariffs will directly impact high profile consumer goods such as clothes, footwear, video games, TVs, phones and sporting goods. When Trump says he is going to ‘tax the hell out of China’ it is will become apparent to the majority of the US population that it is the US suffering the tax. I expect a much bigger public backlash as the retailers tell consumers the price rises are due to Trump’s tariffs. He will completely own this
• The direct impact is a further 0.2% off US GDP and 0.1% addition to the core inflation (assuming 50% pass through)
• There will likely be some indirect effects on business confidence and financial conditions
• The Fed can offset some of this. The market has moved to fully price in a September rate cut. This seems reasonable, but I think the Fed will be reluctant to commit to more stimulus than is already priced. This is because there is a chance that Trump might suddenly pivot and strike a deal. The Fed will also intensely dislike Trump’s attempt to bounce them into rate cuts. It might be easier to resist if these tariffs prove more directly inflationary on consumer goods
• Tariffs will raise revenues, but the budget has now been set. So there seems little scope to recycle the tax in other giveaways to cushion the blow
• The next question is how will China retaliate. They have already said they will take necessary countermeasures. China will not appreciate Trump’s bullying tactics. They will also feel embarrassed that they undertook good faith discussions with Mnuchin and Lighthizer only for Trump to brutally slam on tariffs without any advance warning during the meetings
• The calculation is probably already shifting towards inflicting maximum pain on the US to precipitate a change in administration after the 2020 Presidential elections. Trump could well be doubling down on a failing strategy to force China into structural reforms which China won’t agree to
• In the meantime, we expect more stimulus measures from China and a willingness to let the RMB go through 7 against dollar. This will help offset some of the pain, but we are still inclined to take another 0.2% off official China growth for next year
• US companies operating in China are likely to find the environment increasingly difficult. Both directly through increased regulation, fines and discrimination and indirectly via a patriotic boycott of US brands. China will also probably wage a campaign to put off tourist travel to the US