Weighed down by Trump

Fears of a major trade war between the USA and China negatively impacted the world's stock exchanges in March. Although the rhetoric is harsh, we do not believe the situation will spin completely out of control.

For the month as a whole, the US S&P 500 Index fell by 2.5 per cent measured in USD, while the European Stoxx 600 Index dropped by 1.9 per cent measured in EUR and the Nordic VINX Index declined by 2.3 per cent measured in NOK.

50 billion please!

Trade policy and protectionism were the major topics discussed in March. Trump has previously raised the customs tariff on solar cells and washing machines, affecting China among other countries. Then there were tariffs on steel and aluminium. Just before Easter came the announcement that many had feared – increased customs tariffs aimed directly at Chinese goods. An import tariff of 25 per cent or more on selected Chinese products worth more than USD 50 billion. Although this is a clear escalation and targeted measure, it is not expected to negatively affect China's growth by more than 0.1 to 0.2 percentage points.

The elephant in the room

China, which provides almost one-fifth of the USA's imports, has always been the elephant in the room when there is talk of a trade war and the size of the trade deficit. China's immediate response to Trump's measures was to warn of tariffs of up to 25 per cent on a large number of US products, including cars, aircraft and chemicals – also worth USD 50 billion. The question is now whether these announcements are the start of negotiations or just the first of many protectionist measures.

China could also respond by selling US government bonds, which in isolation will lead to higher US government bond yields. The paradox of Trumponomics is that the national debt will increase sharply in future and must be financed by other countries. At the same time, Trump wants to reduce the US trade deficit, which really means borrowing less from abroad and repaying debt.

The road ahead …

Although the rhetoric is harsh and Trump is an impulsive person, we do not think these announcements will lead to a trade war. We are probably now entering a lengthy negotiation period during which it is likely that China will have to give in to some US demands and imbalances, but both countries will be able to come out of the conflict with their heads held high. It is also worth remembering that the underlying economies are still strong and this is something that usually helps to stabilise factors.

"Some days you're the kid with the stick, some days you're the pinata"
Alec Baldwin