“Protectionism” and “Trade-Wars” have been some of the most commonly used phrases across newswires this year, with no signs of concerns abating anytime soon as Mr Trump marches ahead with his aggressive trade and investment policies. Just what he will achieve is completely unknown, but what we do know is that trade wars and protectionism are never a good thing for any nation, and are the greatest threat to global growth.
Just yesterday we heard that 31% (from 6%) retaliatory EU tariffs on imported bikes from the US has forced the iconic and largest motorcycle manufacturer in the US, Harley-Davidson, to review its production capabilities in the US. According to its regulatory filing, the motorbike manufacturer estimates that each bike would cost roughly $2,200 more, or roughly USD 90-100m annually, once the EU increases its tariffs. Touted as a “model American manufacturer” by Trump just last year, Harley Davidson has said it would prefer not to pass on the extra cost to customers, rather absorb it as necessary, and as such has announced plans to move some of its production out of the US. Although it is still unknown just how much of the production will be sent abroad, and where it is to be sent, we are sure that this isn't the last company to undertake a review and is the exact opposite effect that Mr Trump has been aiming for; i.e. reviving the US manufacturing sector.
Then there’s the whole China situation, where the US-administration appears to be launching attacks on a daily basis, now aimed at the tech sector. The S&P tech index suffered a beating yesterday (alongside broader developed equity markets), following the US’s announcement that it will look to limit China’s investments in US tech companies; flight to safe assets has seen the UST curve rally, and flatten even further to August 2007 levels. Although China has shown that it is more than capable of enforcing equally damaging tariffs and regulations, it does not seem to want to engage in the trade games (stating that it has no intention to prevent US companies from investing in Chinese companies) and instead is looking for other methods to counter potentially costs to its economy. Over the weekend we heard of the PBoC’s targeted 50bps RRR cut, effective July 5th. The country’s reserve requirement is amongst one of the highest globally; we could see a further cut this year to sustain liquidity as trade tensions mount and as China continues to deleverage, through medium-large financial institution debt-for-equity swaps. Following recent trade tensions, China’s Ministry of Finance has proposed a reduction in income tax, in order to boost domestic demand; via an increase in the minimum threshold. Both measures do not suggest a loser approach to policy, rather clearly prove that the nation has sufficient firepower to deploy to maintain strong and stable growth, and manage external shocks and the renminbi.
Just on the renminbi, there are a number of reports floating around suggesting that China is using the currency as a tool to counter potential trade effects, we see little indication that this is the case. Yes, the offshore renminbi has weakened recently due to a broadly stronger dollar and short-term market sentiment (although still remains one of the best-performing currencies against the greenback so far this year). However, it seems to us rather counterintuitive to weaken a currency in the face of a US president who is desperate to name China a currency manipulator, and in a nation pushing for domestic-led consumption. Instead, we see the PBoC as allowing market forces a larger say in the exchange rate with little intervention; evidenced by the fact that the country’s fx reserves have in fact remained stable, above USD3.1tn this year.