Four words sum up the broad consensus from financial analysts with regard the escalating trade wars: “This can turn ugly…”
China responded overnight, to Trump’s first $50 billion volley (retaliatory or not) in the trade war, with what many are calling a warning shot with a targeted $3 billion set of tariffs on US products. Chatter about yuan devaluation (the ultimate next stage in the trade war) were stymied as PBOC fixed modestly lower and offshore yuan is bouncing back a little.
However, broadly-speaking, none of this is positive and The FT provides a quick roundup of what analysts are saying about the brewing trade war between the world’s two largest economies.
ING Asia Pacific chief economist Robert Carnell:
If the tariffs go ahead as planned, then we believe China will retaliate. It is impossible to imagine that they cannot. And then we expect the US to retaliate further.
This can turn ugly on a global scale very quickly. And synchronous global growth or not, markets are right to be pricing in a more subdued outlook.
Although this trade dispute is largely a US-China one, it has the potential to embroil much of the Asian region.
ANZ economists Raymond Yeung and Daniel Wilson:
Chinese authorities will stand firm as an advocate for globalisation but will respond to the US’s announcement on a bilateral basis. It will not devalue its currency.
Although the face value of the US tariff will be small, President Trump may push other countries to take sides, resulting in a divided world. The scale of the trade war would be broadened. This is the biggest risk lying ahead.
Our major worry is whether President Trump’s tactical approach will spill over to the rest of the world. He deliberately relates trade measures to foreign policy.
JPMorgan Asset Management global market strategist Hannah Anderson:
The equity market will bear the brunt of the market reactions. Most impacted will be the US, Korea, and Taiwan as companies domiciled in these markets make up a significant portion of the global production chain of Chinese exports.
The effects are likely to be felt more strongly in the US and increase in both consumer and producer prices. Exports are extremely important to the Chinese economy, but have been trending less so in recent years and the U.S. has been shrinking as a share of China’s export market.
Other than the potential modest inflationary impact on U.S. consumer prices, which could bias the Fed toward a more hawkish stance, impact in the bond market is like to be limited.
The Economist Intelligence Unit global chief economist Simon Baptist:
The initial list of products proposed by China should be seen as a minimum opening retaliation, showing that China will prefer to keep any trade war contained and within World Trade Organisation parameters, but it has clearly left the door open to expand these if US actions escalate.
Excluding consumer goods such as iPhones from the tariffs won’t protect US consumers from price increases. China is so integral to global supply chains for many products that a good portion – but not all – of the tariff impact will be passed onto US consumers.
China’s swift response to Trump’s tariff announcement and the departure of national security adviser HR McMaster from the White House “seem to have been the last straws” for the dollar against the yen, Westpac senior currency strategist Sean Callow said, adding that the break through the ¥105 mark was “disturbing”.
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Put another way – more to come!