US-China bilateral friction may persist until US Nov elections, says Manulife Asset Management

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KUALA LUMPUR (July 20): Manulife Asset Management (Manulife) said although the first round of tariffs placed by the United States and China on selected bilateral imports as at July 6 is likely to have a minimal economic impact, bilateral trade friction may well continue until the US mid-term elections in November or beyond.

In an Investment and Market Note recently, Manulife senior Asia strategist Geoff Lewis said although the first round of tariffs is likely to have a minimal economic impact, bilateral trade friction may well continue until the US midterm elections in November or beyond.

He also noted that in mid-term election years the S&P500 index typically performs poorly in the summer months ahead of the vote but later stages a strong rally into year end.

Lewis said business and investor uncertainty has the ability to dampen economic growth.

"It is, however, impossible to gauge the magnitude of this indirect channel of the trade dispute on economic activity, growth, jobs and inflation — there are no reliable estimates available, not even 'guestimates'.

"It is likely to show up as reduced business capex and hiring, but with such a strong US economy the losses from trade protection — both direct and indirect — are likely to be 'lost in the counterfactual'," he said.

Lewis said China has gone to great lengths not to appear over-aggressive in response to US pressure, even taking world time zones into account to avoid giving the impression that China launched the first blow.

"But whilst continuing with an accelerated program of opening up the Chinese economy and financial sector as promised, Beijing has at the same time stressed that it will match US import tariffs dollar for dollar, blow by blow.

"So we can assume that US tariffs will be expanded to cover an additional US$16 billion of items on the Office of the United States Trade Representative's (USTR) 'hit list' in order to reach the Administration's US$50 billion target.

"We may safely assume that China will immediately follow suit with tariffs on an additional US$16 billion of US exports to China," he said.

Meanwhile, Manulife chief economist Megan E. Greene said this first round of tariffs is the equivalent of a single mosquito bite as far as world trade and the global economy is concerned.

"Everybody now knows that the 25% tariff on US$50 billion of US imports from China is only regarded as a small negative shock by economists.

"Their macroeconomic models point to a drag on China's GDP growth of just 0.1% to 0.2% in a full year under the new tariffs," she said.

Manulife said for investors, its advice is that much of the uncertainty over the initial trade skirmish is likely already discounted in the weak performance of global stock markets since early June.

"In the absence of further escalation, there could be a growing risk in being out of the market as the US mid-term elections draw near.

"Before Americans go to the polls on Nov 4, there is a good chance that President Trump decides to declare a victory on trade, agreeing to a new deal with China and pocketing the concessions on offer," said Greene.