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Tensions high in trade tussle

26 days ago

What’s the background?

US President Donald Trump has pushed his ‘America First’ policies since first hitting the campaign trail back in 2015/16.

“Trade reform, and the negotiation of great trade deals, is the quickest way to bring our jobs back.”

This stance has seen the US pursue re-negotiation of trade deals with a raft of countries since his election, with China being the biggest target. 2018 was the year that saw words turn into actions, with tensions climbing steadily higher. Three rounds of tariffs were brought in by the US on over $250 billion of Chinese goods, causing China to retaliate in a ‘tit for tat’ move.

Truce?

With tensions reaching a peak towards the end of 2018, a 90-day truce was agreed on any further escalation to help facilitate talks. This contributed to the strong first quarter rally for stocks that saw many indices move back towards their record highs after 2018’s fourth-quarter slump.

Despite signs of positive progress, the temporary ceasefire ended without a deal amid strained relations.


What’s happened since?

While both sides have said that talks are still ongoing, the calmer environment has been disrupted.

  • The US has increased tariffs from 10% to 25% on around $200 billion of Chinese goods

  • The US put a further $300 billion of Chinese goods in the firing line for tariffs

  • China has retaliated by raising tariffs on $60 billion of US goods

Global markets have reacted negatively to this, falling amid fears that the global economy will be harmed further.

The Architas view

It is likely we’ll have to endure further volatility, as we have seen in May, but if a deal eventually materialises it could give a boost to global markets.

While trade wars tend to hurt both sides, as the US imports far more from China than China does from the US, the US has far less to lose. This has fed stockmarkets’ recent reactions.

While US indices have taken a slight hit, investors have sold Asian and emerging market equities quite aggressively. Developments in China tend to dictate the performance of both regions given the volume of exporting trade that goes through China.

Additionally, the recent tariffs are being brought in at the start of June. The impact on companies is going to be far more immediate than last year when there was a lot more lead time to allow companies to make alternative arrangements for the supplies they needed.

The fragile political backdrop is something we have long been conscious of, and contributes to our cautious outlook for stock markets at the moment.

We believe that holding a variety of different investments diversified across countries, asset classes and investment managers has never been more important.

 

The value of investments and any income from them can go down as well as up and is not guaranteed. You could get back less than you originally invested. Past performance is not a guide to future performance. The views expressed within this article are those of Architas, who may or may not have acted upon them.

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