As the world’s two biggest economies continue to up the rhetoric and trade threats ahead of a potential heavyweight clash, investors this side of the pond will no doubt be wondering how badly the UK will be hit by the fallout of a trade war between the United States and China.
Markets rose on Monday morning as US president Donald Trump moved to ease fears of an all-out fight by tweeting that China will ‘take down’ its trade barriers because it is the ‘right thing to do’.
But concerns are still lingering after weeks of sparring, and despite Trump’s comment, Xinhua News Agency, the official mouthpiece of China’s ruling Communist Party, said in a commentary that Beijing is up for a fight. It added that ‘the US is set to become a public enemy of global multilateralism’.
This comes after Trump threatened to place tariffs on $150 billion (£106 billion) worth of Chinese goods, after China responded to tariffs on its steel imports with taxes on $3 billion worth of American goods and the threat of another $50 billion of its own tariffs.
How protected is the UK?
As the fifth largest economy in a globalised world, inevitably the question arises as to what impact the ongoing trade ding-dong will have on the UK. For now, it would appear, the answer is not very much.
An import-heavy country – with $625 billion worth of imports compared to $404 billion of exports in 2016 according to official data – the UK seems to be relatively immune from the direct ramifications of a US-China trade war.
That is a view shared by Erik Lueth, global emerging markets economist at Legal & General Investment Management (LGIM), who predicts Asian countries could bear the biggest brunt.
He said: ‘The impact on countries depends on whether their products are competitors or complementary; so countries like Brazil, who are big soybean producers for example, are likely to profit from the trade war.
‘It will be a negative for countries, mostly Asian ones, who provide goods for China to import from China to the US. Taiwan and Malaysia would be the countries most affected by this.’
As the UK fits in neither category, Lueth explained, it should be spared from the blows both sides look to land on each other.
But he added: ‘The only way it could affect the UK is if [the trade war] gets out of hand and starts to impact growth in the global economy.’
Even then, LGIM only predicts that a ‘fully-fledged’ trade war would at its current rate subtract only 0.3% from Chinese growth and 0.1-0.3% from US growth, with a similar figure for the global economy.
Should a trade war progress further however, something the World Trade Organisation director-general Roberto Azevedo has issued a warning on, both British businesses and consumers could very well feel the impact.
Neil Dwane, global strategist at Allianz Global Investors, said the trade war seems to be at a point where it is ‘beginning to spiral’, and highlighted the US midterm elections in November this year as a possible reason why the Republicans have been fanning the flames.
He said: ‘We’ve discovered Trump has an agenda and this trade battle with China is popular with the people who voted for him.
‘He’s got one eye on the elections in November and if the S&P continues to fall, it doesn’t mean Trump will stop imposing trade tariffs on China. A lot of people who voted for Trump don’t own any shares.’
On what it could mean for the UK, Dwane warned that companies will start to see ‘rising friction’ in their business models and forward planning as they wait to see if they will be affected by the tariffs.
He added: ‘Any trade restrictions on the UK would push up prices for the UK consumer. Low wage growth, rising interest rates, sterling weakness and inflation makes us feel the pound in our pocket doesn’t go as far, and if prices go up we could reduce our spending further.’
Despite the trade war escalating markedly since the steel tariffs were put in place, commentators have said that significant swings in stock markets to something of an equilibrium point shows that investors think trade war fears are overblown.
And Dwane’s explanation for the ‘sanguine’ markets is the belief that, with a US president in charge famous for his Art of the Deal business book, ‘we are still in this smoke-filled room. Those $150 billion of sanctions are still capable of having a deal done on them’.
Certainly JP Morgan seems to be one of those sanguine investors. Mike Bell, global market strategist at JP Morgan Asset Management, believes the numbers involved in the trade dispute do not ‘seem so big or scary’.
Looking at the $50 billion of tit-for-tat tariffs the US and China have proposed, Bell said the proposed tariffs would be 25% of $50 billion dollars, about 0.06% of US gross domestic product (GDP) and 0.1% of Chinese GDP.
But he highlighted the fall in the S&P 500 as a buying opportunity, with the S&P 500 forward P/E falling from 18.4x at the start of the year to around 16.6x recently.
An optimist on the US, he added: ‘Valuations have come down and the outlook for growth and corporate profits should remain in robust health for the rest of this year.’