US$60 Billion Dollar Man – all bark and small bite

Last week US President Donald Trump announced a plan to impose tariffs on around US$50-60 billion of Chinese imports. Calling this ‘the first of many’ lead global markets into an episode of panic selling with the Dow, Nikkei-225, & the Hang Seng Index plunging 720-970 points in one session! However, is this $60 billion ‘trade war’ really a big deal? Not really at all! First of all, total Chinese exports to US total more than $500 billion a year (deficit US$375B) and hence the $50-60 billion accounts for only 10-12% of the overall exports. More importantly, this is only the initial figure that will be watered down substantially in the next few weeks after various negotiations and likely some small concessions from the Chinese government on the Intellectual Property side for Mr Trump to declare victory and allow the US to attain its goal of helping Republicans win the mid-term elections this coming November. Besides the negotiations and compromise from the China side, local US businesses and their congressmen will also lobby to exempt those that affect them. In short, this could easily knock $20-30 billion off the total bill to an eventual $30-40 billion in actual size. Should that be the case, the damage to the Chinese economy would be negligible. Total US exports (approx. $500 billion) roughly accounts for 2.5% to Chinese GDP growth last year, the $30-40 billion exports affected therefore would be roughly 0.15% – 0.20% of China’s Gross Domestic Product. However, not all affected exports will disappear; due to limited alternatives on some products, the tariffs may not reduce the quantity of exports at all and the US consumer might end up paying half or more of the tariffs, although profit margins of some Chinese producers could suffer. In short, the overall damage of China’s economy by these tariffs could be 0.1% or less.

Risk of Retaliation & Escalation

Without retaliation & further escalation, this US$50-60 billion-dollar man is ‘All Bark and Small Bite’. Of course, the risk of further escalations and deterioration is possible. However, looking at the gentle retaliation of US$3 billion reciprocal tariffs announced by China, it seems that the Chinese government seems not overly keen to escalate this further. In fact, we suspect that the East is collaborating with Mr Trump on this gigantic political show which means there is limited chance for further escalation to a full-blown trade war between the two biggest economies. Without a much bigger escalation, the existing tariffs is not much more than a multi-national political drama for the Tuesday November 6th 2018 election. While certainly this could drag global markets for the next few days or weeks, this would not derail the robust global synchronised growth and the long-term stock market uptrend worldwide. So, long-term investors should ignore this noise and hold investment assets and avoid panic selling as fundamental economic and earnings growth around the world and in China remain robust. Conversely, investors may use this volatility to bargain hunt quality shares in local and global markets for long-term gains.

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