The first quarter of 2018 was difficult for global equity markets. The UK FTSE100 fell 8.2 per cent, the main US Equity Index fell 1.22 per cent while the European STOXX50 Benchmark price index fell 4.1 per cent. Core European investment regions were also negative with the German index suffering a decline of 6.3 per cent and the French equity index losing 2.7 per cent.
The declines year-to-date followed an optimistic initial rally which ended late in January. Consensus that the global economy was heading into a period of synchronised growth was broken by concerns of an increasing yield scenario. In February, indices continued to suffer as inflation indicators seemed to justify higher yields.
However, despite constant rhetoric, markets were unprepared from what was to follow. In March, US president Donald Trump appeared to throw the metaphorical spanner in the spokes of the global economy by first proposing tariffs on imported steel and aluminium and then proposing tariffs on China intended to address imbalances.
Understandably China reacted by imposing its own tariffs on US imports, however, yesterday we were dealt with the second round of tariffs by the Trump administration. The latest tariffs are aimed squarely at China’s ability for technological advancement. The latest tariffs include:
• Chemicals, used to make hydrogen peroxide; painkillers; vaccines; insulin; antibiotics; anti-malarials; synthesised forms of B2, B12, E and other vitamins; wound dressings; surgical supplies; dental cements, fittings and tools; chemical contraceptive preparations based on hormones or spermicides; lab and surgical sterilisers; catheters; defibrillators and their parts; hearing aids; pacemakers; tools for radio-nuclear medicine including x-rays.
• Various steel products including stainless and silicon electrical steel; wires; steel used to make oil and gas pipelines, pipes for drilling; steel for tools; metal for car suspension and hinges; water boilers and condensers; steam turbines; among other products
• Lathes; boring and drilling machines; milling machines; grinders; hydraulic presses; grinding, sanding, cutting machines for wood, cork, bone, hard rubber, hard plastics and similar hard materials; hand tools; chainsaw parts; blow torches; welders and solders; rock crushers, grinders, kneaders; concrete, mortar and bitumen mixers
• Scanners and printers; disk drives; printed circuits for various uses; disks, tapes, solid-state drives; cassette players; radar and navigational aids; remote controls apparatus; fuses; electrical resistors; volt meters; thermostats; LEDs; touch screens
• Rocket launchers; artillery guns, howitzers and mortars; military rifles and shotguns; pistols and their parts and accessories; bombs, grenades, missiles and torpedoes
• Cruise ships, excursion boats and similar vessels; ferry boats of all kinds
• Motor vehicles w/diesel engine, or diesel engine and electric motor to transport 10 to 15 or 16+ more persons, including the driver
• Golf carts and similar motor vehicles; Motor vehicles specially designed for traveling on snow; Motorcycles; Helicopters
• New and re-treaded pneumatic and non-radial rubbers tires used on aircraft
• Steam turbines for marine propulsion; Vapour turbines (other than steam) for marine propulsion; Parts for internal combustion aircraft engines; Aircraft turbojets, turbojets of a thrust not exceeding 25 kN; Hydraulic power engines and motors, linear acting; Pneumatic power engines and motors
• Balloons, dirigibles and non-powered aircraft, gliders and hang gliders
• Air combat ground flying simulators; Flight data recorders
• Parts of central heating boilers
• Bakery ovens, including biscuit ovens
• Refrigerating or freezing equipment
• Instantaneous gas water heaters, nonelectric
• Centrifugal clothes dryers
• Brewery machinery
It does not require much thought to realise that the US administration is trying to handicap China’s technological ability. But what this boils down to is probably nothing more that the established empire attempting to hold back the new kid on the block.
China has been a challenge on the global sphere for some time now. Previous US administrations probably realised the futility of trying to keep in check Chinese economic and technological growth and its global influence. So the next best alternative was to integrate China within the global economy. Economic agents that depend on each other are less likely to end up on the battlefield. And hopefully one day China would also experiment with democracy, maybe even become an ally.
The success of this strategy may be debatable. Trump certainly sees it as a ‘lose-lose’ relationship, but on the other hand, future generations will probably not remember the current US president for his grasp of economics and foreign policy.
What he sees as an easily winnable trade war might just be the spark that unravels the slow gains towards global peace that have been achieved since the world wars. At least China acknowledges that there will be no winners out of this.
The main market view remains that China and the US will reach a negotiated solution, both in terms of trade and investment restrictions. But even if this were the case, it could take a while to resolve, and market nervousness will probably characterise the short-term. While anticipating the next round of retaliatory tariffs from China, there is no doubt in my mind that the first shots of the trade war have been fired and there is no going back. Investors are now considering whether it is best to take cover or stand by and watch.
Disclaimer:
This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.