The Trump administration raised existing US tariffs on Chinese goods on May 10, ratcheting up tensions in its ongoing trade dispute with China and causing elevated concerns on the part of global investors. Supporters of the tariff measures argue that they are needed in order to change China’s trade behavior, citing limited US access to Chinese markets, intellectual property theft, and the subsidization of state-owned businesses. Critics of the White House maintain that import tariffs on Chinese goods serve only to increase costs for American consumers and businesses, while stoking retaliatory measures by China that damage US exporters.

No Big Deal
Vaughan Nelson CEO and Portfolio Manager Chris Wallis suggests that a US-China trade agreement would not be as earth-shattering for US business as numerous headlines and wide-ranging political bluster portend. “I don’t think any US corporation is thinking ‘If we had a [finalized] trade negotiation, I’d really increase my capital into China,’” says Wallis. According to Wallis, macroeconomic evidence pointing to slower growth and decreasing productivity in China – in addition high levels of debt – are likely to prove more influential to businesses and investors than any near-term trade agreement.

What’s more, says Wallis, any final trade agreement is likely to be difficult to enforce in China. “There’s no question that in the aggregate, free-flowing global trade is important, but it seems clear there is no great [US-China] resolution here.”

It’s Complicated
Wallis also takes issue with the idea that tariffs burden US businesses and consumers alone and argues that the reality of tariff measures is more complex. “I expect China will weaken its currency as tariffs go into place [and] subsidize its key industries, allowing them to cut price in order to maintain their competitive stance.” “Ultimately,” he says, the cost of tariffs “is not borne by any one single individual group or classification, it’s spread out through supply chains, both domestically and in China.” “It doesn’t mean it won’t materially impact specific companies,” he says, “but in an economy the size of the US, it’s much more muted.” Wallis believes in the near-term, Chinese officials will want to move beyond trade negotiations and boost liquidity contend with weakening economic data. Beyond the news cycle and political considerations, Wallis maintains that US officials will remain mindful of the need to address federal deficits through the sale of US treasuries to China and beyond.
The views and opinions expressed represent the subjective views of the contributors as of May 2019. They are subject to change at any time based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Actual results may vary. This material is provided for informational purposes only and should not be construed as investment advice.

Important Information
All investing involves risk, including the risk of loss. There is no assurance that any investment will meet its performance objective or that losses will be avoided. The ability of an actively managed investment to achieve its objective will depend on the effectiveness of the portfolio manager.

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