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18 April 2018

Fears of protectionism are back on top of the agenda since late February, following decisions made by the US President. First President Trump announced taxes on aluminium and steel (10% and 25% respectively). Then he singled out China, imposing a 25% tax on $60 billion in Chinese imports.

The impact on the markets has been significant: equities and fixed-income products have declined considerably, while credit spreads have widened. Volatility should remain high in the short term as the markets await details on the products targeted and retaliation measures by China.

Do these new developments pose a challenge to the optimistic scenario of global growth?

Are we witnessing the start of a trade war, or is it merely political posturing in preparation of the US midterm elections?

  • The measures adopted for aluminium and steel will not have significant impacts on growth, as the combined imports of these two commodities account for only 0.5% of US GDP. Only the automotive and construction sectors will potentially see an impact.
  • Similarly, the taxes imposed on Chinese goods are unlikely to compromise recent trends in either US or Chinese growth. A 25% tax on $60 billion in imports represents $15 billion in tax revenue. With total Chinese exports to the US of around $450 billion, this tax amounts to 3% of the total. Various studies estimate a roughly 1% impact on the profits of US companies.
  • China did not initially react to the earliest announcements, but it ultimately decided to retaliate using equivalent measures.
  • Could Trump go even further? He'd likely meet opposition from lobby groups and Congress, who are generally more favourable to free trade. But even if an open trade war with China seems an irrational move, this scenario cannot be fully ruled out.

Surprisingly, inflation anticipations did not benefit from the news. The market seems more concerned about a possible recession than a period of stagflation—the natural consequence of trade wars.

At this stage, we believe the impact on global growth will be moderate. The recent disappointments over economic data are also unlikely to compromise our scenario, as these figures are still broadly compatible with global growth of around 4%.

Thus, for the medium term, we are maintaining a positive outlook on the equity markets, which are currently quite inexpensive compared to other asset classes. We are also maintaining a slight upward bias on interest rates and inflation breakevens.

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