Following the US announcement that tariffs on $200bn of Chinese imports would increase to 25% as of Friday markets broadly traded with a risk-off bias into Thursday’s close. Unsurprisingly, China warned of ‘necessary countermeasures’ if the US went ahead with the intended tariff increases. A further round of trade negotiations did take place between the Chinese and US in Washington on Thursday with Chinese Vice-Premier Liu He heading up the Chinese delegation. But so far this looks to have been to no avail as overnight the US ratcheted up tariffs on Chinese goods. Negotiations are expected to continue today, which perhaps explains the relatively sanguine response from markets at the time of writing. Market commentary suggests Chinese state funds may have been buyers with the Shanghai Composite ending the day +3.1%.
The threat of tariffs reaches beyond US-China to the US’ other trading partners such as Europe and Japan. Trump has been threatening to impose tariffs on auto imports and a ‘section 232’ report from the US Department of Commerce on February 17 opened the door for him to impose 25% tariffs on auto imports on national security grounds: the President has 90 days to make a decision on this, although with opposition from Congress and with trade talks ongoing the decision could get delayed. Europe agreed a mandate in April to begin negotiations with the US on industrial goods although has threatened to suspend negotiations if auto or further tariffs are imposed.
The OECD noted in a recent economic outlook ‘Motor vehicle exports represent around 10% of total EU merchandise exports to the United States and there are significant supply-chain linkages within Europe that would spread the impact widely across countries and firms.’ Earlier this week, the European Commission released an updated set of economic forecasts which saw estimates for Euro area growth cut to 1.2% this year and 1.5% in 2020. Valdis Dombrovskis, Vice President for the Euro and Social Dialogue, noted that while the ‘European economy is showing resilience in the face of a less favourable external environment, including trade tensions’ he also warned that ‘risks to the outlook remain pronounced. On the external side, these include further escalation of trade conflicts and weakness in emerging markets, in particular China.’ For us, increased protectionism is a key threat to the global growth outlook.