Mark Lister, 26 July 2018

I don’t think these trade tensions are going away anytime soon. While many of us might think of increasing protectionism as a huge backward step for the world, President Trump isn’t concerned about our opinion. He’s playing to the voters that put him where he is.

According to a recent survey by Pew Research, the majority of Americans are against further tariffs. However, among Republican voters a whopping 73 per cent think more tariffs will be good for the US. This is the group that Trump cares about, and in their eyes he’s doing a great job.

The US is embroiled in a number of trade skirmishes at present, most importantly with China. An escalation of these disputes would impact global economic growth at a time when the recovery remains fragile in many respects.

The initial round of tariffs would have probably had a negligible impact. However, the stakes were raised with the announcement another US$200bn of Chinese imports might also attract them. The tough talk has continued since then, with the President now saying he’s willing to go further still.

It’s extremely difficult to assess where this could all end up. Should China retaliate in kind to what’s currently proposed, most estimates suggest this could knock around half a per cent off global growth. If things go further, the impact gets larger.

The US has less to lose than many of its trading partners, given it has a stronger economic footing and a more closed economy than most. At the other end of the spectrum, Europe and many emerging markets are more at risk.

The likely impact on interest rates and central bank policy could be mixed. Slower growth suggests easier monetary policy, although globalisation has been a strong deflationary force (along with technological advances) over recent decades.

A reversal of this could fuel higher prices and inflation over time, providing further impetus for interest rates to rise. Having said that, an escalation would initially see interest rates fall as nervous investors look to the safety of bonds and fixed interest.

For New Zealand, the direct impact of the current ructions is limited. However, China is our biggest export market (taking almost 20 per cent of our goods and services) and the US is number three with 11 per cent.

As a small, open economy we are highly dependent on our ability to do business easily with the rest of the world. We rely heavily on exports, which account for some 30 per cent of our gross domestic product and this is a space we need to monitor closely.

For now, global sharemarkets are taking these uncertainties in their stride. Maybe they’re being a little complacent, or possibly the strong earnings growth we’re seeing currently is offsetting worries.

It’s possible the trade tensions subside, with public hearings and a review process still to come in the US and the response from China an unknown quantity.

However, President Trump seems happy to sacrifice a little growth in exchange for a stronger political position heading into the US mid-term elections in November, and beyond.


This article was also published in the New Zealand Herald under the title "Mark Lister: Trade talk not going away anytime soon" on 22 July 2018.