Is a Trade War with China Looming?
Category: Investment Research
The escalating trade rhetoric between the US and China has recently garnered headlines as the countries have announced or enacted tariffs. We believe these actions mark a shift in the trade relationship between the US and China—from one of tolerance to one of engagement. We remain optimistic that common ground can be found, but are carefully watching the progression of talks and announcements.
China’s scale has made it a global force since it joined the World Trade Organization (WTO) in 2001 and there are legitimate concerns about imbalances in America’s economic relationship with China. These include China’s provision that foreign firms can only gain access to its market through joint ventures, a lack of intellectual property protections, and China’s growing ambitions to move up the value chain through the “Made in China 2025” initiative (a push to comprehensively upgrade Chinese industry). The US is seeking to re-balance the economic relationship through concessions that include financial sector liberalization, lower subsidies to state-owned enterprises, smaller auto tariffs, and allowing foreign firms to have a majority stake in Chinese companies. We are encouraged that China has already loosened some regulations by allowing foreign firms to have 51% ownership stakes in financial companies as of late 2017.
We are optimistic that the countries remain in dialogue, but we are less sanguine on the path taken thus far. The governments would be better served by taking their grievances to the WTO, which exists for such purposes, rather than threatening tariffs and invoking archaic national security exemptions. Indeed, tariffs are widely considered to be an ineffective solution to establishing trade parity.
Thus far, the tariffs have mostly been announcements rather than policy actions, and the timeline for execution is also quite drawn out. A public hearing on trade is scheduled in Washington, DC for May 15; US companies have a comment period until May 22; and the US government then has at least 180 days to decide policy, which leaves a lengthy window for talks and the possibility of many revisions along the way.
We are watching the events closely, but the prospect of more concrete policy steps would be necessary to change our long-term economic outlook and portfolio positioning.
Athena Capital Advisors has published a detailed analysis of the potential China trade tariffs, including a historical review of the trade relationship between the US and China and possible portfolio implications should the tariff announcement result in policy actions. The landscape review can be accessed here.