Investment Insights

Investment Insights: Trade "Negotiations"

9 April 2018

By Cliff Aque, CFA, Investment Strategist

Much is being made in the mainstream media about a trade war between the United States and China, and the continued back and forth between Washington and Beijing has added to market volatility. While the initial announcement of $50 billion worth of Chinese goods sounds large, it should be examined as a percentage of total imports with China, which were over $505 billion in 2017. Thus, the initial 25% tariff on 10% of imports equated to a 2.5% tariff across all imports.

 

A further escalation from $50 billion to $150 billion after the market closed on April 5, 2018 and China’s immediate response will likely add to market uncertainty in the short-term. However, it should open the door to negotiation as China only imported $130 billion in goods from the U.S. in 2017 (and $50 billion in services). China wants other countries to see it as being pragmatic by responding through legal channels to keep its access to both outbound investment and inbound capital. Retaliation through selling its Treasury holdings or depreciating its currency seem unlikely, but are risks.

China’s significant participation in the global supply chain, makes it in everyone’s interests to come to a resolution. With a public hearing on the U.S. tariffs scheduled for May 15 and seven days afterward open for feedback, there is still time to talk, but a negotiated solution is not going to be easy. The markets will certainly be watching and, until there is more certainty around the final outcome, they will continue to be volatile.