Trade Frictions: Broadening Out
Comment of the Day

March 07 2018

Commentary by Eoin Treacy

Trade Frictions: Broadening Out

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

Eoin Treacy's view

Here is a link to the full report and here is a section:

Rising risk of trade frictions and disputes: While the move to impose tariffs on steel and aluminum products was already in the public domain, the timing (after the action to impose tariffs on washing machines and solar panels in Jan-18) and intensity (the toughest option has reportedly been selected) with which these measures have been taken up is a concern.

Direct impact should be manageable from the trade partners’ perspective, as these products account for only 4% of the US import basket and only 0.6-1.1% of China, Japan and Korea's exports. Moreover, our base case view is that the global growth backdrop remains favourable and underlying demand for Asia's exports should remain supported.

Indirect impact of broadening and persistence of protectionism risks: The response of trade partners will be key to watch. If trade frictions do broaden and persist for longer, Asia will be the region most affected via the potential disruption to global supply chains, as companies re-evaluate where to locate their production facilities. From an equity market perspective, increasing trade protectionism has been a concern in general for our equity strategists and in particular a potential negative for markets in North Asia, given the high export revenue sensitivity of South Korea, Japan and Taiwan. In contrast, our strategy team views ASEAN markets and Brazil as relatively defensive in this context.

Trade wars are only manageable if both parties decline the temptation to escalate. This is still very early and some still doubt whether the Trump administration will go ahead with tariffs even after Steve Cohn’s resignation. However, Trump also started his re-election campaign last week and this move is aimed squarely at his voter base in the exactly the same way as the tax cuts were.

This link to the US International Trade Commission’s website highlights the fact minerals and metals represents the largest deficit of any sector for the US economy at $23 billion. It is followed by Transportation equipment at $14 billion, Chemicals and related products at $11.5 billion and electronic products at $10 billion. If this policy escalates the next target is likely to be under the moniker of let’s build “American cars in America” or “Let’s Build iPhones in America”.

This is an important trend to monitor because it is likely to have knock on effects as the EU, China and other markets retaliate.

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