U.S.-China trade tensions in perspective

Financial markets globally have been rattled in recent weeks by escalating rhetoric of a possible trade war between the United States and China. U.S. President Donald Trump and Chinese President Xi Jinping have essentially exchanged barbs concerning billions of dollars in possible steel and aluminum tariffs, as well as potential tariffs on a host of other commodities, such as wine, nuts, soybeans, pork, and sorghum.

Sam Xie, head of research, CBRE China, earlier this month addressed some potential ramifications for the real estate industry — in U.S./China trade tariffs — what does it mean for real estate? — even though he believes an unresolved trade dispute, or all-out trade war, is highly unlikely.

Gathered below are some noteworthy thoughts from experts globally who have, through their writings, been making sense of the sometimes daily shifts in proposed trade policy — even now, Trump is seeking information about possibly rejoining the Trans-Pacific Partnership, which he summarily exited by executive order in the early days of his presidency.  By and large, these insights remind investors that no changes have been made yet, and that many nations are exempt from the proposed tariffs. They also note, however, there is cause to account for additional market risk as a result of growing trade tensions, and they discuss the issues of greatest import when considering potential trade wars:

• “So far what we have really seen is not a trade war but a phony trade war between the U.S. and China. The tit-for-tat tariffs, triggered in relation to U.S. steel and aluminum imports, are trivial in size. All the other tariffs are just proposals, contingent on the U.S. and China being unsuccessful in reaching a negotiated solution. Our view is that a negotiated solution will head off their implementation, indefinitely delay them contingent on trade success or result in very watered-down tariffs. President Xi Jinping’s speech at the Boao Forum committing to lower import tariffs for various products, increased market access for foreign investors and strengthened protection of intellectual property rights echoes comments by Premier Li [Keqiang] and indicates that China is aware of the issues and willing to negotiate. PBOC Governor Yi [Gang] has added more detail in relation to making it easier for foreign participation in the Chinese financial system and indicated China will not manipulate a renminbi depreciation in the trade conflict. So it’s a good first step …. The real issue is that America as a nation spends more than it earns, which results in it importing more than it exports. The only way to solve this is for it to save more, but the now rising U.S. budget deficit due to tax cuts and spending hikes will mean it will save less. So while a deal with China may reduce the U.S. trade deficit with China, the trade deficit will simply shift to other countries.

— Shane Oliver, head of investment strategy and chief economist, AMP Capital, in U.S. China trade war fears — Q & A, April 12, 2018

• “The prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail global growth prematurely. While some governments are pursuing substantial economic reforms, trade disputes risk diverting others from the constructive steps they would need to take now to improve and secure growth prospects. That major economies are flirting with a trade war at a time of widespread economic expansion may seem paradoxical­ — especially when the expansion is so reliant on investment and trade …. Governments need to rise to the challenges of strengthening growth, spreading its benefits more widely, broadening economic opportunity through investments in people, and increasing workers’ sense of security in the face of impending technological changes that could radically transform the nature of work. Fights over trade distract from this vital agenda, rather than advancing it.

— Maurice Obstfeld, economic counselor and director of research, International Monetary Fund, in Global Economy: Good News for Now but Trade Tensions a Threat, IMF Blog, April 17, 2018

• “It’s interesting reading much of the commentary claiming that China President Xi Jinping has blinked in the face of U.S. pressure over trade. I may be obtuse, but I didn’t see any softening of the Chinese position in Xi’s speech at the Boao Forum for Asia earlier this week …. President Trump appears to believe the Chinese are softening. The reaction to the list of goods on the $100 billion tariff list will be very interesting, as China’s exports are not enough to match the tariffs dollar for dollar. If Beijing insists on reciprocity in value, then the [People’s Republic of China] operations of large U.S. firms may be in the crosshairs.”

— Bill Bishop, publisher of Sinocism China Newsletter, Axios China, April 13, 2018

• “We explored two hypothetical scenarios: a trade war contained to the U.S. and China, and an escalation in which all countries increase tariffs against each other. Under both scenarios … the global economy slows down while inflation picks up in the short term, and the U.S. dollar appreciates relative to the yuan, due to decreased demand for yuan as bilateral trade [note: this scenario does not address the possibility of China retaliating by selling U.S. Treasuries] diminishes …. The realized returns from March 8 through April 4 were similar to the hypothetical U.S.–China trade war scenario, which suggests that equity markets have approximately priced in this scenario. However, we find there is room for a further 10 percent price drop should tensions escalate to an all-out trade war. And while the U.S.-China scenario is in good agreement, generally, with what has been realized, the Chinese equity market actually outperformed the scenario projection. This suggests that, for now, financial markets deem China to be more resilient than the modeled scenario while U.S. markets have almost completely priced in the recent tariffs.”

— Thomas Verbraken, executive director, risk management research, MSCI, in What if the U.S.-China trade war escalates?

• “The [World Trade Organization] is facing an influx of disputes from countries using national security as a justification for tariffs. This exploits a loophole in WTO law that permits its 164 members to take any action they consider necessary to defend ‘essential security interests.’ Trade officials are concerned that the WTO could be sidelined if countries increasingly abuse the national-security exemption to justify their trade restrictions. WTO Director General Roberto Azevedo said it would be better for countries to address their national security concerns at a political level, rather than testing the limits of the WTO system …. Since August 2017 the U.S. has blocked nominees to the WTO’s appellate body — a key forum for mediating disputes — saying it has overstepped its mandate …. If the U.S. continues its hold, the appellate body will be paralyzed in late 2019 because it won’t have the three panelists required to sign off on rulings. Azevedo said the U.S. block could eliminate the WTO’s role as a trade dispute forum and lead to a ‘domino effect’ of trade retaliation.”

— Bryce Baschuk, Bloomberg News, in The Five Biggest Threats to the WTO, April 10, 2018

There are certainly best- and worst-case scenarios when reading the trade-tension headlines of the day. For the foreseeable future, the need for cooler heads to prevail will remain an understatement.