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Article | 27 March 2018 | Investments
Trade wars have a way of getting out of control quickly and President Trump has shown he doesn’t like to back down
President Trump recently announced the second round of tariffs as he targets what he sees as unfair trade practices from China.
In the first round, which Trump announced at the beginning of March, the US imposed a 10% tariff on aluminium and 25% tariff on steel imported into the country. Mexico and Canada will be exempt from these tariffs depending on the progress of discussions over the North America Free Trade Agreement (NAFTA).
These initial tariffs were seen as more motivated by domestic politics as the financial impact on China is minimal.
The second round of tariffs are more specifically targeting China as the US looks to impose tariffs worth an estimated $50bn. The value of each individual tariff is based on the economic damage caused by perceived intellectual property theft, although a flat rate has been mentioned. Areas that will be affected include aerospace, information communication technology, and machinery although this list is likely to widen. The European Union has been given an exemption until May.
China responded and has outlined plans to introduce tariffs on US imports accounting for around $3bn. The levels of tariff introduced by the US are lower than expected and the response from China is very restrained. So far they have expressed a desire to avoid engaging in a full blown trade war.
However, trade wars have a way of getting out of control quickly and President Trump has shown he doesn’t like to back down. He has always stated he wanted to address what he sees as unfair trade with China. As such, things could easily escalate before politician’s sit-down to negotiate a truce.
Markets have started to price in the potential impact of a trade war but there is the potential for further sell-offs if things escalate. Any sell off is likely to create potential investment opportunities as global growth is still healthy. Investors should ensure they have some protection should things deteriorate whilst being prepared to take advantage of the inevitable opportunities that market volatility will throw up.