Some unintended effects of US-China trade tensions
April 2018
Patrick Zweifel, Chief Economist
Share this article
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
Patrick Zweifel joined Pictet in 1997. He is Chief Economist at Pictet Asset Management. Before assuming his current position in 2009, he was head of the “Macro Research Team” at Pictet Private Wealth Management. In particular, he had economic research responsibility for emerging markets and Japan, and for the development of quantitative models on major asset classes, primarily foreign exchange models. Before joining Pictet he was a research assistant in econometrics and monetary theory and worked on international research projects for the World Bank and the European Union. He 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 joined Pictet Asset Management in 2011 and is Head of Asian Equities Ex Japan, including the India and China teams.
Before coming to Pictet, Avo worked for Putnam where he was an Investment Manager with responsibility for Asia Pacific ex Japan strategies. He began his investment career with Putnam in 1998 as an analyst.
Avo graduated from Clark University in Massachusetts with a Bachelor's in International Studies, and holds a Master's in International Affairs from the Colombia University of International Public Affairs.
Share this article
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
This website uses cookies to enhance user experience and to collect statistical data. You may refuse to accept cookies or change your settings by clicking the following link: Cookies policy. By continuing to browse this website, you accept the use of cookies for the above purposes.
