Some unintended effects of US-China trade tensions
April 2018
Patrick Zweifel, Chief Economist
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As tensions between the US and China over trade tariffs escalate, a potentially brighter picture of trade dynamics is emerging.
Trump-Xi trade discussions: a blessing in disguise?
The gap between China’s nominal exports and imports to the US is the largest ever, as Fig.1. below shows. This is the argument used by President Donald Trump for raising import tariffs on Chinese goods.
While the move has sparked tensions between the two countries, we believe a positive side-effect is that it could well accelerate the opening of China's services sector to overseas participation. China has promised to open its economy further – in particular promising to speed up the pace of ownership reforms for the country’s financial sector with a timeline for implementation of just a few months, which could help avert a trade war.
Fig1. China bilateral trade with the US (in USD)
Source: Pictet Asset Management, CEIC, Datastream, 28.02.2018. *Combined Jan. & Feb. data to adjust for Lunar New Year holiday.
Overall however, Trump’s plan for a drastic rise in tariffs is unlikely to reduce the US trade deficit with China. The US simply cannot produce the goods currently imported from China at competitive rates, at least not in the short term. For now, it will have to continue importing these goods and higher import tariffs will make them more expensive, pushing up inflation in the US.
How can Trump’s trade agenda impact other emerging regions? The case of Argentina and Brazil
Economist Anjeza Kadilli is just back from Argentina and Brazil where she met with policy makers.
She believes Brazil and Argentina could be the big beneficiaries of the trade tension between the US and China. Both Brazil and Argentina already account for a large part of soybean exports to China. Their share will be even bigger if China decides to stop imports from the US. This new pattern would open opportunities for investors not only in agriculture, but also in related sectors such as manufacturing, infrastructure and machinery.
One obstacle is that Brazil and Argentina currently have the highest import tariffs (14.1% and 14.3% respectively, excluding agricultural products) and are also fairly closed economies (see Fig.2).
Fig.2. Emerging Markets' import tariffs and trade openness
Source: Pictet Asset Management, CEIC, Datastream, 31.03.2018
However, from what she heard during her trip, Anjeza feels there is a strong will, from Brazil in particular, to reduce tariffs even if this means doing it unilaterally. Policymakers would focus domestic production on segments where they have real added value (e.g. agriculture), and reduce tariffs in areas where they cannot reasonably compete with overseas competition (e.g. industrial sectors). This would be a positive development for the efficiency of these markets.
CHART OF THE MONTH FROM OUR EMERGING MARKET EQUITY TEAM
By Avo Ora, Head of Asia (ex-Japan) Equities
Busy Street scene with neon signs in Hong Kong
Asia’s growing intra-market trade offers new opportunities
While China is fighting off new protectionist measures from the US, encouragingly intra-market trade within Asia has been increasing. To capture this encouraging trend in our portfolios, we are playing the continuing opening-up of the region’s financial sectors, in particular via Chinese insurers or Indian banks, where market penetration is currently low.
Fig.3. Insurance product penetration within Asia (2016)
Source: MS Research, 2016
MARKET WATCH
Market Watch data
30.03.2018
Source: Datastream, Bloomberg, data as at 30.03.2018 and in USD. Equity indices are quoted on a net dividend reinvested basis; bond and commodity indices are quoted on a total return basis. The currency rates evolution is treated as a performance calculation based on FX rates.
Patrick Zweifel, Chief Economist, Nikolay Markov, Senior EconomistMarch 2018
About
Patrick Zweifel
About
Patrick Zweifel
With over two decades of experience at Pictet, Patrick has been crucial in building the firm’s macroeconomic research capabilities. At Pictet Asset Management, he leads a team of 4 economists. Patrick plays a key role producing research that helps shape the global investment strategy of the firm and which is fundamental to the investment decisions of fund managers. His analysis helps identify structural imbalances and business cycle turning points through the use of proprietary quantitative models and leading indicators on activity and inflation.
Patrick’s interest for Emerging and Asian economies began following his work on International Economics for the World Bank and for the European Commission in the mid-1990s. He went on to teach econometrics and monetary theory at HEC Lausanne and HEC Genève until he joined Pictet Wealth Management in 1997, where once again he focused on Emerging Markets and Currencies and rose to Head of Macro Research. Patrick then joined Pictet Asset Management as Chief Economist in 2009.
Patrick holds a PhD in econometrics from the University of Lausanne.
About
Anjeza Kadilli
About
Anjeza Kadilli
Anjeza Kadilli joined Pictet in 2015. She is an Economist in Pictet Asset Management’s Economic Analysis team where she conducts macroeconomic analysis of emerging markets with a special focus on Latin America. Anjeza holds a PhD in Econometrics from the University of Geneva - where she also obtained an MSc and BSc in Economics. During her PhD, Anjeza spent time at the University of Southern California, Riksbank and HEC Montreal as a visiting scholar.
About
Avo Ora
About
Avo Ora
Avo Ora has been investing in Asian ex-Japan equities for the best part of 20 years. This experience has shaped his way of looking at the market, which seeks to capitalise not only on the region’s structural growth prospects but also on cyclical opportunities. Having started his investing career at Putnam in Boston, Avo Ora joined Pictet Asset Management in 2011 and is the Head of the Asia ex-Japan equities team which includes the India and Greater China teams. Avo graduated from Clark University in Massachusetts with a BA in International Studies and also holds a Masters in International Affairs from the Columbia School of International Public Affairs.
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