TRiUMPh or Tragedy? Economic nationalism and the Trade War.

SG Hiscock & Company
Andrew Gillies
Andrew Gillies
SG Hiscock Analyst
We’ve all heard the term globalisation. A more globalised world has fewer borders, and these borders are less restrictive.

In an economic context, globalisation is the reduction of barriers to free trade. It’s easy to think globalisation, in a general context, is increasing.

We live in a world where it is increasingly easy to get around, and real time news can inform us of the current affairs on the other side of the world as they unfold. However, with populist politics and a right-wing swing, we do not live in a globalising world. 

To avoid confusion, it’s necessary to view the economic and political as separate. In this piece, we will focus on the economic argument, honing in on the effects of the Trade War between China and the United States.

This is a key theme that will persist in global markets well into 2019 and potentially beyond.

There are myriad reasons Donald Trump has engaged Xi Jinping. Central to Trump’s position is that China has engaged in unfair trade practices for many years. Trump contends that China has acted in their own national interest, rather than coming to the global trade party.

China have restricted access to their markets, been more opaque in their disclosures and dealings, and this has been to the detriment of other nations. To discuss the reasons for the Trump Administration’s decisions in depth is beyond the scope of this piece. Let’s focus on what has happened, what the potential outcomes of this are, and what that means for markets.

What has happened:

The below chart depicts the amount of bilateral trade between China and the US subject to tariffs.  

Source: Goldman Sachs Global Investment Research, USITC

The darker blue section shows the amount of trade subject to implemented tariffs, with the lighter blue box showing the amount of trade subject to proposed US tariffs. As we can see, there is a lot of scope for escalation, particularly once the rate on these exports is ratcheted up, as is expected in the New Year.

Outcomes:

There are several impacts. Firstly, it is positive for Chinese imports to the US, as US businesses increase their imports before the tariffs are imposed. 

Secondly, in the medium to long term, supply chains are interrupted as the effective costs of imports goes up, and other countries imports become relatively cheaper. Taking washing machines as an example, as washing machine tariffs increase, Chinese washing machines become relatively more expensive when compared to other countries.

In the short term, US businesses order more parts to “front-load” before tariffs are imposed and their costs go up. As businesses factor in this increased cost, and potentially source machines from other countries. This disruption can lead to longer term structural changes to supply chains.

There is a qualification: this ignores the potential for global businesses to ship intermediate goods (unfinished washing machines) to other countries. They finish them (slapping a sticker and some buttons on the unfinished machine) and export these consumption goods onwards. It becomes quite clear that the ripple effects of these policies extend far beyond the US and China, especially for countries like Australia that are large net exporters to China.

From an Australian perspective, many fear potential implications from increased US tariffs. However, as most of the goods we export to China are consumption goods, not intermediate goods, the impacts to this date are relatively minor. To be clear, what we export to China mostly never leaves the Chinese economy as something else.

Despite this, we have a long way to go. In looking at the potential remedies to this Trade War, it’s clear political posturing and genuine concerns over trade practices are firmly entrenched in both nations. There are three potential paths this Trade War can take. 

1. There is a rollback of tariffs
2. There is a pause in the increase of tariffs
3. There is an escalation in tariffs

All of these are relatively unlikely in the short term, but it’s highly unlikely tariffs would be rolled back without a significant compensatory act from China. It is more likely they are paused, and also quite likely that they are escalated.

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The idea that China's trade practices are a major problem is now a bipartisan position between Democrats and GOP. China is so dependent on trade that they will have to make concessions.

Thanks Andrew. Definitely interesting to see what comes out of the G20

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We engage with a hand-picked team of external research providers to complement our insights in the macroeconomic landscape (both locally and abroad) and general investment trends. We also have an exclusive joint advisory arrangement with one of the world’s largest commercial real estate investors; LaSalle Investment Management Securities, LLC is a subsidiary of global property giant, Jones Lang LaSalle. This provides our property team access to LaSalle’s research capabilities.