Shifting Trade Politics Should Not Be Ignored

Following the breakdown in US/China trade negotiations earlier this month, US and Chinese actions since then point in our view to a protracted period of tariffs. While Trump has placed additional tariffs on Chinese goods, China has allowed the renminbi to depreciate markedly since May 10. Furthermore, Trump’s announcement of restrictions on telecoms suppliers, aimed indirectly at Huawei, indicates the probability of a trade deal in the short-term is remote. We note forecast earnings momentum is easing again after improving earlier in the year and cyclical sector PMIs are under pressure. As tensions in respect of Iran continue to rise, it remains a good time to re-appraise risk levels in portfolios in our view.

It is becoming increasingly likely in our view that the breakdown in US/China trade negotiations is serious and will take some time to resolve. There appears to be disagreement in principle in respect of any enforcement mechanism. Press reports indicate an unacceptable redrafting of the text of the agreement by China. This is likely to weigh on markets where the prevailing consensus still seems to be hopeful of some kind of deal in the short-term.

The actions of the parties since the breakdown in negotiations are not encouraging, however. The Chinese delegation sent to Washington left with no schedule for further talks. Since then, the Chinese renminbi which represents the most direct riposte to new US tariffs has been allowed to decline sharply, Exhibit 1. Trump has followed through with new tariffs on China. In addition, last week’s US executive order implicitly targets the Chinese telecoms firm Huawei by shutting it out of US markets. Reports that intelligence-led briefings are being held at US companies detailing China’s threat to the US technology sector are also unhelpful. We suspect the actions of the US will have caused significant antagonism within China’s administration and have created an environment hostile to any formal agreement.

Exhibit 1: China’s currency has been allowed to depreciate during May, as US/China trade talks collapse

Source: Refinitiv

Financial markets may have moved on from the global financial crisis of 2008 but echoes continue to be heard in the West’s political domain in terms of populism. Political shifts which have had a much longer time-lag compared to monetary or fiscal dynamics are only now starting to bite the real economy with the pivot in US trade policy and more recent increases in US tariffs. In another example of the lagged impact of populism, the UK is still attempting to negotiate its way out of the free trade area of the EU, following the referendum result of 2016. Although investors may have become inured to talk of tariffs the effects, with the expected lag, are now becoming evident in the data. Global trade volume growth is currently softening at a rate not seen since the global financial crisis, Exhibit 2.

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