Economic and Strategy Viewpoint - May 2018
Trade wars, and how they might affect the US, emerging markets and Japan, are the focus of this month's viewpoint.
Unstructured Learning Time
Trade wars: An easy win for the US?
- The US has raised tariffs on Chinese imports and China has responded in kind. However, the mood has improved lately, raising hopes of a deal between the two countries which we believe is President Trump's aim ahead of the mid-term elections in November.
- China is more limited in its scope to raise tariffs, but that does not rule out a host of measures it could take to make life difficult for US companies. Furthermore, China might be able to stick out the pain that a trade war would bring for longer than the US. It has more potential for fiscal support and, of course, President Xi's communist party will not be facing elections in the near future.
Trade wars and emerging markets
- Trade wars will undoubtedly have EM casualties, but there could be scope for some limited gains too. For now, at least, the pain is likely to be concentrated in Asia, but that will not hold if the conflict engulfs the rest of the globe.
Japan: How vulnerable is Japan in trade wars?
- As long as US-China trade tensions remain contained, the impact on Japan is limited.
- The impact of US aluminium and steel tariffs on Japanese growth is minimal. Japan is the most exposed developed market economy to US-China trade wars due to its prominence in the Chinese supply chain. But as a proportion of Japanese GDP, again, the vulnerability is low.
- A surge in the yen as a safe haven asset would be a headwind to Japanese exports, inflation and earnings. Meanwhile, the cyclicality of the equity market would likely lead to underperformance in Japanese equities.