Chart of the week: more than one way to tax trade

Source: WTO, Global Trade Alert, Aberdeen Standard Investments (as of May 2019)

The US-China trade war has been making noise in news headlines worldwide. The greatest focus has been on US-imposed tariffs on Chinese products. But imposing tariffs isn’t the only way one nation can land an economic hit on another. Both sides have an array of threats and weapons they could use in the forthcoming battle, unless tensions die down.

The trade war between the US and China recently escalated to new heights. In mid-May, President Trump, emboldened by a strong US economy and low unemployment rate, tweeted about raising tariffs on Chinese goods. He claimed that the tariffs would jump from 10% to 25%, and apply to as much as $200 billion-worth of Chinese products. Within days, the threat became a reality, raising investor uncertainty and sparking market volatility.

If this battle worsens, then the next moves could include non-tariff threats. The best example at this time is China’s threat to discontinue supplying the US with rare-earth materials. These materials are crucial components of the devices we rely on every day, like mobile phones and rechargeable batteries. Another example is that European firms are avoiding Huawei in the race to create a 5G infrastructure, because the US has placed it on a restrictive ‘entity list’.

Other non-tariff barriers include: quantitative, product-specific quotas, discriminatory rules of origin, export subsidies, anti-dumping measures, special safeguards and technical barriers to trade. They also include sanitary and phytosanitary restrictions, or rules to protect humans, animals or plants from diseases and toxins.

All of these measures pose a threat to their targets. For example, US tech companies who rely on Chinese rare-earth minerals to manufacture mobile phones may feel the sting of the trade war most keenly in their supply chains. Japan faced a similar threat from China a few years back which had noticeable consequences.

The US has imposed more non-tariff measures than it’s endured, but both sides are ramping up the rhetoric. The danger is that as the two largest economies trade blows, so global growth slows rather than recovers into the year end. Companies and households are delaying capital spending and major decisions on buying big ticket items amid this jump in political uncertainty.

It is important for investors to recognise that there are winners as well as losers in this battle. For example, other countries may benefit from changes in trade flows. As companies plan to move production out of China and into other countries, such as Vietnam or Korea, so investors should look for profitable new investment opportunities.

Markets always need to price economic and company news, but political decisions over a whole host of trade and regulatory issues are becoming ever-more important for successful investing.

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Risk warning

Risk Warning

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.