Risk Disclaimer 

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Trade war or trade truce

There are many in financial markets who believe that trade wars can bring down the global economy. We have a more sanguine view. While concerning from a global macro perspective, the size of tariffs that have been announced and proposed by both the US and China are relatively small as a proportion of the overall economy.

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Chinese exports to the US are a small and declining share of China’s GDP, about half the proportion of ten years ago. We have yet to see so-called ‘second order’ effects from the implementation of tariffs, by which we mean a negative impact on business and consumer confidence and, in turn, business and consumer spending. Tariffs will have a modest negative impact on US growth and a modest upward impact on US inflation. Considering the strong performance of the US economy, the overall impact should be relatively small.

Equity markets imply that a trade war would have more of a negative impact on China than the US and that is  evidenced by the fact that Chinese companies with a high proportion of their sales to the US have significantly underperformed US firms who have a high proportion of their sales to China. While the conclusion of a trade deal between the two countries is far from certain, we think that calmer heads will prevail, not least because a trade deal in the medium term is in the best interests of both the US and China.

Risk Disclaimer 

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Basket performance vs. local index

Source: Bloomberg, as at September 2018

Chinese exports to the US rose strongly after it joined the World Trade Organisation in late 2001 but have been falling since 2006 and are now less than 4% of GDP. In terms of value added, the share is even lower as these data include imported components. Following the Trump tariffs, Chinese exports to the US are set to fall markedly particularly if, as we expect, the rate is increased to 25% on 1 January 2019. But the result is likely to be a diversion of the source of US imports from China to other countries. South Korea or Japan could provide more high-tech goods while labour-intensive products could be sourced from Vietnam or Mexico. In addition, Chinese exports outside the US would increase. There would be some job creation in the US but this is likely to be limited and offset
by lower production by US companies facing higher input costs due to the tariffs.

The recent trade deal between the US, Canada and Mexico supports our view that the Trump administration does not want a full-scale trade war but is focusing on China.

While the conclusion of a trade deal between the US and China is far from certain, we think that calmer heads will prevail.

China Exports to the US (as a % of GDP)

Source: Bloomberg, as at September 2018

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