The attached note looks at the US-China trade and its impact on investment markets. The key points are as follows:
- The trade war between the US and China is escalating, posing a rising threat to global growth.
- Although we remain of the view that a deal will be reached, the risk has increased.
- Share markets may need to fall further in the short term to remind both sides of the need for a deal and get them talking again.
- However, we regard the fall in share markets as another correction rather than the start of a major bear market.
After a third round of talks made little progress last week, the US/China trade war has escalated badly with tit for tat moves on an almost daily basis by each side. This has seen share markets fall sharply with US, global and Australian shares down about 5-6% from recent highs and safe haven assets like bonds and gold benefiting on the back of worries about the global growth outlook. This note looks at the key issues.
What is a trade war?
A trade war is where countries raise barriers to trade with each other usually motivated by a desire to “protect” jobs often overlaid with “national security” motivations. To be a “trade war”, the barriers need to be significant in terms of their size and the proportion of imports covered. The best-known global trade war was that in 1930 which saw average 20% tariff hikes on US imports.
What is so good about free trade?
A basic concept in economics is comparative advantage: that if Country A and B are both equally good at making Product X but Country B is best at making Product Y then they will be best off if A makes X and B makes Y. Put simply, free trade leads to higher living standards and lower prices whereas restrictions on trade lead to lower living standards and higher prices.