Markets spooked by trade war spectre

Brendan Rynne, Partner, Chief Economist
Brendan Rynne, Partner, Chief Economist

Unless you are a speculator, uncertainty is not a friend to financial markets. Volatility in prices and returns keep investors on the sidelines, dampening economic activity and slowing growth in the process.

A fundamental role of government is to help markets peer through the fog of uncertainty and bring stability to situations through considered policy and transparency of directions and actions.

But escalating actions have led to the current trade tension situation between the US and China, where uncertainty is rising. This is now spilling over into broader global and domestic markets, making them increasingly jittery over the possibility of a trade war morphing from skirmishes into the “real deal”.

They are right to be uneasy; previous analysis by KPMG Economics has shown an escalating trade war would have serious consequences for both the world and Australian economy.

Earlier this year the Trump administration announced it would introduce 25 percent tariffs on US$50 billion of goods imported from China. The first tranche of this materialised a fortnight ago, with the US implementing those 25 percent tariffs on about US$34 billion of Chinese imports, with the other $16bn to follow.  In response the Chinese government announced a “tit-for-tat” response to the US tariffs, applying trade protection measures to an equal amount of imports from the US.

Then, last week, the US government upped the stakes significantly by promising a further 10 percent tariff on a much wider range of Chinese imports, including many consumer goods – totalling some $200bn.

If that pledge materialised, it would mean the US had imposed tariffs on almost half of its imports from China.

In the last few days, there have been more conciliatory comments from both the US and China governments, with the Vice Minister of Commerce in China saying “we should sit down and try to find a solution to this trade problem”, and US Treasury Secretary also acknowledging that the US was “available” for negotiations.

These statements are welcome and we must hope that cool heads prevail and both sides step back from the brink.

The complication of course is that these tensions are more just about trade.  Wrapped up in the same discussion is the treatment of foreign direct investment in US technologies by China and how China negotiates with US companies for the use of their Intellectual Property. But tariffs can never be the answer.

KPMG is one of many voices expressing the fundamental economic truth that there can be no winners from a trade war.  KPMG’s recent global CEO report revealed fears of a return to territorialism weighed heavily on domestic and overseas business leaders – rising protectionism was rated second top in the ‘threats to growth’ among Australian CEOs and top globally.

This qualitative assessment is backed up by KPMG’s quantitative analysis which showed retaliation by other countries to US tariffs could tip the world economy back into a GFC-style recession.

We must all hope the current tensions defuse quickly – and urge policymakers around the world not to endanger the free trade policies which have brought so much growth to the global economy in the last few decades.

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