US-China Trade Spat To trade and not to war

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1 Commentary US-China Trade Spat To trade and not to war March 2018 Yang Liang CHUA, PhD (UPENN) Research & Strategy, ARA Private Funds ARA Asset Management

2 US - China Trade Spat To deliver his election promise of closing the trade deficit with China, and to make the US great again, President Donald Trump on March 23, announced his plans to impose tariffs on up to USD billion in annual imports across information and communications technology, aerospace and machinery industries from China. Details of this 25 percent tariff on a list of products will be unveiled over the course of the next two weeks. Aside from this tariff on China imports, the Trump administration also introduced a 25% tax on steel and 10% on aluminium on March 23, three weeks after it was first announced. 2

3 Woof Woof Canada and the European Union (EU) lashed back at the US after Trump s original announcement of the 25% tax on steel and 10% on aluminium in all countries for an unlimited period. The EU threatened to retaliate with duties on U.S. bourbon, peanut butter, cranberries and orange juice while Canada Foreign Minister responded firmly by calling any trade restrictions absolutely unacceptable without providing further details on their retaliatory action. Subsequently, a night before the implementation of the steel and aluminium tariffs on Friday, March 23, the Trump administration released proclamations that tariffs on such goods from Argentina, Australia, Brazil, the European Union, and South Korea would be on hold until May 1, joining Canada and Mexico, which have been exempted. Such reprieves at the eleventh hour have led to some market watchers to regard the Trump s policy approach as having more bark than bite ; with an initial bluster that is more impressive than its eventual follow through. In the last couple of days since the announcement of additional tariffs on China imports, the US stock market, as measured by the Dow Jones Industrial Average and S&P 500, has shown some reprieve. While Asian markets are reeling in from the initial shock, reports are becoming more sanguine what was initially termed as trade war is now a trade spat, with some alluding it as a mere precursor to trade negotiation. Source: ARA Research & Strategy 3

4 More Bark than Bite In truth, there is no tariff imposed on China yet. The presidential memorandum that was signed by Trump merely provides the instruction to the US Trade Representative to consider tariffs on Chinese imports as a retaliation against the country s trading practices which are believed to be unfair. Reportedly, in this document contains there is a 30-day consultation period that only starts when the list of Chinese goods is published. This 30-day period, arguably, provides the space for both parties to discuss the myriad of issues from trade imbalances to Trump s allegations over China s intellectual property theft and forced technology transfers. In response to the earlier trade spat from the US, China has responded firmly with their plans to impose additional taxes on 128 US products accounting for about USD 3 billion in imports. Many have regarded this to be China's initial reaction to Trump's steel and aluminium tariffs rather than a reaction to the latest tax on Chinese imports. The scale of this tariff seem conservative just USD 3 billion in additional tariffs on US goods ranging from fresh fruit, nuts, wine and pork to recycled aluminium and steel pipes, although it is commensurable to the total dollar import value of Chinese steel and aluminium articles into the US in What is also missing is soybeans, sorghum and Boeing aircraft which are key US exports, further illustrating China s stance of having no desire to destabilise the global trading system. Nonetheless, the market expects some retaliation from China in the coming days when the US releases the list of Chinese products it is targeting. 4

5 Uncertainty Breeds Contempt But whatever Trump s intention has been or whether his bark is louder than his bite, regulatory uncertainty doesn t bode well for the economy in the long term. Professor Robert Schiller, in an interview on the side of the China Development Forum in Beijing, has warned of an economic crisis should US firms be cut off from their supply chains (referring to their existing business networks with China). The impact of the trade war would also be more psychological than direct. Most firms are built on long-term planning, and the uncertainty that trade war brings could only lead to a recession as more enterprises hold back their investments. UBS predicts that a trade war could reduce Asia exports growth from 12-13% today to 5-10% while Capital Economics was more sanguine as it predicts the impact of the recent steel and aluminium tariffs would reduce China s GDP by 0.1%. Overall USB puts the risk of a damaging retaliatory reaction from China at 20-30% probability. Asian markets have shown some stability on the Monday following the tariff announcement, especially after the US Treasury Secretary Steven Mnuchin said in an interview on Sunday that he was cautiously hopeful that the two economic powers would reach a deal to avoid the tariffs that Trump has ordered. 5

6 Maintaining Our Strategy Real estate is a long-term play. While any political and trade uncertainty would add on risks to the current investments, it also offers opportunities. As an asset management firm, we are always scanning the environment for potential risks to our investments, and we will continue to monitor this trade debacle and adjust our investment strategies as necessary. Meanwhile, we maintain our cautious optimism for the following reasons: 1) At the Davao summit earlier this year, China has reiterated its pro-trade and globalisation stance and promised to opening up its domestic economy, particularly the financial sector, to foreigners. China has no intention to destabilise global trading and therefore would be open to discussing with the US on the trade imbalance and intellectual property issues. 2) The Trump's recent policy stance seem to have more bark than bite and is unlikely to want to break the trade relationship with China. Based on Bloomberg data, the US maintains an export surplus (in Services) with the world, and circa 50% is with China as at end The USD 375 billion trade deficit that Trump argued, pertains to only goods and merchandises. Since 2014, the export of Services to China has grown at an average 12% p.a. compared to an average decline of 2% p.a. for US export of Services to the rest of the world. With the recent relaxation of foreign ownership rules in the banking and insurance sector, including the dismantling of ownership limits in many financial sectors in three years time, we should expect the US economy to benefit further in the near term. 3) China has sufficient domestic growth momentum and together with the Belt and Road Initiative, which has increasingly taken on a more global span (Artic and South America) than the historical Silk Road, these should support continual growth in the region. Therefore we maintain our investment strategy for core markets in Asia Pacific overweight on China, Hong Kong, Singapore, and Australia; neutral on Malaysia and Korea. 6

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8 About the Author Dr Chua Yang Liang heads up the Research & Strategy team at ARA Asset Management. He is responsible for monitoring the economic and property markets across Asia Pacific, and providing strategic advisory to the Firm. Dr Chua has almost 20 years experience in the research and planning-related field. His most recent stint was with JLL where he headed their research teams across South-East Asia. Trained as an urban planner, Dr Chua brings to the Firm a different perspective to property market research and he publishes original papers covering property market updates as well as investment and property related matters. Dr Chua has a doctoral and a master degree in city planning from the University of Pennsylvania, USA. He also has a BSc in Estate Management (First Class) from the National University of Singapore. ara-asia.com 2018 ARA Asset Management Holdings Pte. Ltd. All rights reserved. The information contained in this document is proprietary to ARA Asset Management Holdings Pte. Ltd. All such documentation and information remains the property of ARA Asset Management Holdings Pte. Ltd.