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This month saw the imposition of 25% US tariffs on $34bn of imports from China, with US duties on another $16bn of Chinese goods to be added following a consultation period. As yet, initial direct economic impact from these tariffs appears minimal. Metal exports to the US are less than 3% of total exports even for Canada and Mexico, while for China, the latest levies are expected to knock only c.0.1-0.2% off GDP growth. However, Trump’s threat of tariffs on an additional $200bn of Chinese imports could have more material consequences for growth and ‘risk’ appetite.
The US and China are predominantly domestically driven economies (exports are only 10% of GDP in the US and 20% of GDP in China), but for China, this exogenous headwind compounds the policy induced economic slowdown attributable to Beijing’s deleveraging focus. Moreover, while China’s manufacturing PMIs continue to reflect growth, new export PMIs pointed to weaker trade momentum even before the latest round of tariffs. Beijing’s policymakers have begun to respond, with the People’s Bank of China (PBoC) offering rhetorical support to the renminbi, and recent targeted reserve requirement ratio cuts for major banks indicating a more nuanced approach to deleveraging.
US-China tensions (both economic and geopolitical) are likely to become a more permanent feature of the investment backdrop, as the market is now beginning to price. Despite last month reducing its sectoral “negative list”, China remains particularly restrictive and selective when it comes to foreign direct investment and President Xi’s flagship “Made in China 2025” policy appears to have piqued both sides of the US political establishment to the limitations of “constructive engagement” and the challenge China poses.
Trevor Holder – portfolio manager. Newton, a BNY Mellon company