How investors should respond to Trump's China tariffs

(Mar 23): President Trump on Thursday signed a memorandum directing his administration to take a range of actions against China centered on technology industries in response to the nation’s “economic aggression”. The tariffs were triggered by the Section 301 Investigation that the Office of the US Trade Representative initiated on August 2017. The investigation found that China’s policies resulted in at least USD 50bn in annual harm to the US economy. This is the likely amount of Chinese imports that will be targeted with tariffs, or about 10% of total US imports from China. The detailed list of targeted products will be announced within 15 days and is expected to focus on 10 strategic sectors including robotics and aerospace.

After pairing initial losses following the announcement, the S&P 500 closed down -2.5% and the Dow fell - 2.9% as sentiment soured throughout the afternoon. That being said, investors had expected tariff announcements between US$30 billion ($39 billion) and US$60 billion ($79 billion), with tariffs potentially even higher than the 25% that the Trump Administration announced will be proposed for public comment. Consequently, much of the late day weakness may have been momentum-based and not driven by incremental news flow.

We think it’s important not to overstate the direct impact of these tariffs on the global economy or equity markets at this stage. Today's announcement should have little effect on the US economy. The US$50 billion represents only about 2% of total US imports, while the tariffs will likely be on products that can be obtained outside of China to minimize the harm on the US. The global economy is also entering this period of increased trade tensions from a position of strong growth. 2018 is still expected to be the strongest year for the global economy since 2011. And central banks may yet temper their tightening bias given the threat to global growth from an escalating trade conflict. The Fed, ECB, and Bank of England have all warned of the risks to growth from a trade war in recent days and weeks. But we don’t downplay the potential risks. This latest action is likely to have a negative effect on Asian exports, which are currently growing at 12-13% a year.

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