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.