On the 23rd of March 2018, under the guise of national security, a 25% tariff on steel imports and a 10% tariff on aluminium imports went into effect in the United States of America, as directed by President Donald Trump.
What’s happened so far?
Not surprisingly, countries impacted by the tariffs have threatened to retaliate. The EU threatened tariffs on motorcycles, bourbon and agricultural goods. At the very last minute EU steel exports were exempt, alongside those from Argentina, Australia, Brazil, Canada, Mexico and South Korea.
Unfortunately, things did not end there. Early in April China announced its counter-measures: 25% tariffs on a range of products it imports from the US, such as soybeans, cars and whiskey, and 15% duty on many more products, including cherries, pistachios and wine. Global sharemarkets fell on the news.
What might happen next?
While the tariffs alone may not be that significant so far, the larger concern is that this could be a sign of things to come from the Trump administration and escalate into a trade war. Trump has consistently criticized the impact of trade on the US economy and employment both as a candidate and as president, and he has repeatedly called for a reduction in the country’s $550 billion annual trade deficit. With the tax cut plan passed, he could turn greater attention to trade.
The risk of a trade war cannot be discounted, but it still appears a low probability outcome at this point. There are many Republicans that do not support tariffs and Trump will be wary of how sharemarkets might respond. Nonetheless, tariffs appear to be the negotiating tactic of choice by both the US and China at the moment.
What does it mean for New Zealand?
The US is New Zealand’s fourth biggest trading partner, accounting for $8b or about 12% of our exports. Last year, New Zealand’s steel and aluminium exports to the US made up a small portion of total exports at just $39m and $23m respectively. New Zealand is currently seeking an exemption from the steel and aluminium tariffs. However, in the event that a trade war was to break out, this could create a major headwind for New Zealand, which relies heavily on global trade.
What does it mean for investments?
So far, the trade tariffs are relatively minor in the context of the global economy and are not expected to put much of a dent into growth. In fact, the International Monetary Fund has just upgraded its expectations of global growth for 2018 to 3.9% (which would make it the best since 2011) and China’s first quarter growth also exceeded expectations. However, the increased uncertainty has led to higher in volatility in markets.
A trade war would reduce global growth, slow the spread of technology and disrupt global supply chains, ultimately harming corporate profits and increasing prices. Emerging market economies, which tend to have a greater dependence on exports, would have the most to lose. There is little doubt this would be negative for global equity markets because of the impact on profits. Global bond markets could also suffer as a result of inflationary pressures. Emerging market currencies, particularly those with high exposure to the US, would likely weaken, while the US dollar would probably strengthen.
What action should we take?
We do not suggest clients take any immediate action at the moment. Most see the current face-off more as trade negotiation tactics than the onset of a global trade war, but there is little doubt that the global growth path is now more uncertain. We continue to monitor the situation as one of the risks to the macro outlook, and will provide an update should our views change. However, we recommend that investors consider stress testing portfolios against downside scenarios and, in particular, review the impact of potentially higher inflation scenarios.
Robert Kavanagh is a Portfolio Manager at Mercer Investments, based in Auckland. He advises clients on their investment policies, portfolio structures and fund manager selection.
This article does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.