US and China: More than just fighting talk

30 August 2018 | Markets and Economy


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At the start of this year, when US President Donald Trump started talking about imposing trade tariffs on China many people thought (or were at least hoping) that it would be no more than a war of words. However, fast forward to the summer and trade tensions have escalated, with real concerns that they could lead to a full blown trade war. The US has announced tariffs on $250bn worth of Chinese imports and China have naturally reacted, imposing $50bn of its own tariffs. The US has targeted China in particular in order to put pressure on the country to reduce its tariffs, which as the chart shows are nearly three times as high on average as those of the US, and move forward with market liberalisation.

But markets have not only been made anxious by what is happen between the US and China. Trade wars between the US and its other key trading partners (Canada, the European Union and Mexico) are also a real possibility. Investors are concerned that the imposition of tariffs would reduce global trade and impact economic growth.

Over the first six months of the year, emerging market equities (in GBP) fell by 4.2%, while developed market ex UK equities (in GBP) rose by a modest 3%. Based on these market movements, it is clear which regions investors think will be hit the hardest.

China is being targeted by the US due to higher-than-average effective tariffs

Trade chart

Source: WTO World Tariff Profiles 2017, IMF. Tariff levels reflect the average applied minimum tariff each country assesses on other countries with most favoured nation status.

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