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What's Going On with the Trade War? 🇺🇸🇨🇳

Ok so it's not your usual guns-tanks-drones variety war between the world's two largest economies (phew!), but it is affecting the lives of many people in both countries, with the effects also being felt across financial markets worldwide.

You might be surprised to hear that this dispute isn't really new at all. China has been accused of dumping and other unfair trade practices by many different countries for a few decades now, with the US being one of the biggest complainants throughout. Unfair trade practices usually involve making something cheaper and selling it into a foreign market at a price so low that local industries can't compete.

This "complaining" process usually takes place via the World Trade Order (WTO), a global body which was created in 1995 to mediate exactly these types of trade disputes and bring about peaceful solutions for all parties.

Enter Donald Trump

Trump, on the back of a successful populist 2016 election campaign which was focused on appealing to exactly the types of people who had lost their livelihoods due to Chinese competition (farmers and steel & aluminium workers, to name a few), decided to stop trying to solve these problems via the WTO, and start taking matters into his own hands, and tariffs were the policy tool of choice.

Tariffs? What's a Tariff? Simply put, tariffs increase the price of imported goods. For example, if the US decides to apply a 10% tariff on $100bn of Chinese imports, it will collect $10bn of tariff revenue and the imports will be 10% more expensive in the US market, helping domestic producers of the same goods compete in the domestic market thanks to the 10% price hike of whatever they are producing.

What's not so simple, however, is the end result - a world where both countries keep applying more and more tariffs, which usually ends with things becoming more expensive than they need to be for those who buy the end product - US and Chinese consumers (and often people in other countries, too).

What's happened so far?

  • Round 1: In July 2018, the US started with tariffs on $34bn worth of Chinese goods coming into the US. China replied with $34bn worth of tariffs on US goods coming into China. All square.

  • Round 2: In August 2018, Trump goes again with $16bn in tariffs. President Xi replies with the same amount.

  • Round 3: In September 2018, the US slaps tariffs on $200bn of Chinese goods at 10%. China says *whoah, easy there tiger* and responds with 10% tariffs on $60bn worth of US goods.

    • This was quite a large round of tariffs, so both sides decided to put their trade bazookas away and talk like grown-ups. 

    • Obviously, that didn't really work out with talks breaking down in April this year.

  • Cue Round 4: In May 2019, the US decided to add 25% tariffs on another $200bn of Chinese imports. China pauses for thought, and responds in June with 25% tariffs on another $60bn of US imports.

What's happening now? 

Both sides have been threatening to impose more tariffs one day, before sounding like they're ready to kiss-and-make-up the next. This has been a theme throughout, with President Trump announcing new tariffs and tariff threats seemingly at random via Twitter, creating significant uncertainty for investors, who by now live in a constant state of fear of anything resembling a twitter logo, birds and all.

As for next steps, the Trump administration and Chinese government seem to be heading back to the negotiation table over the next few weeks. 

But this could again prove useless, with some worrying threats laid out over the next few months:

  • US tariffs due to increase from 25% to 30% on October 1st.

  • US also due to introduce a wave of new tariffs on December 15th, which would effectively cover all Chinese imports into the country.

  • China expected to retaliate by hitting another 3,000 US products with tariffs by the end of the year

What does this all mean for you, the investor?

A direct consequence of this trade war has been the creation of extra uncertainty in financial markets over the last year. Investors look very carefully at anything the Trump / Xi administrations say on a daily basis and these words tend to move entire stock markets day-to-day. Something to be aware of, at least for the rest of this year.

One way to stay away from trade related risks when investing could be to look at stock markets or companies which are relatively safe. But this is difficult as almost every major good and service in the world today is related in some way to the US or China. No wonder people run for things like Gold, Silver, Government Bonds and even cryptocurrencies every time the trade war rhetoric intensifies.

In recent months, the US has also shifted its trade focus onto Europe - tricky times ahead, perhaps. 

At least Brexit will be dealt with by then, or will it...

What's Going On with Brexit? 🇬🇧 🇪🇺

It's been 3 years, 2 months & 14 days. A lot has happened since. Jeff Bezos is $50bn richer (yes, really) and Tesla Model 3s are swaggering around European roads. Oh, and British politicians have made *approximately* 5 million trips to Brussels in that time, too.

Let's do a very quick recap of relevant dates:

  • July 2016 - Britain votes to leave the EU 🇬🇧💔🇪🇺

  • March 2017 - UK Government triggers Article 50 - telling the EU they will leave within 2 years, or March 2019 (ha, funny). 

  • Jan - May 2019 - UK Prime Minister Theresa May fails (multiple times) to get her proposed Brexit agreement approved by the British Parliament. She is then forced to request an extension to the withdrawal date, which the EU grants - new "Brexit date" of 31 October 2019. The end of May's premiership came (ironically?) at the end of May this year via resignation. 

  • July 2019 - Boris Johnson wins the nomination to become new leader of the Conservative party, and consequently, the new Prime Minister.

  • August 2019 - Johnson's new government announces they plan on closing Parliament for 5 weeks during Sep-Oct "to give people time to focus on various political party conferences". Not buying it? Neither did most of the country... 

That brings us to this week's events...

Which started with talk of a plan devised by opposition parties that would ultimately take a "No-Deal" scenario off the table. The government's response? To claim it would "handicap" the Prime Minister in any negotiations with the EU (because he wouldn't be able to threaten the EU with a no-deal Brexit), and that they were "determined" to negotiate a deal and avoid a no-deal scenario.

That didn't seem to convince a group of 21 Conservative MPs who decided to vote with the opposition to ensure that a no-deal Brexit is made illegal. These 21 MPs - who were subsequently "fired" from the Conservative party - included 2 former Chancellors and some very senior politicians including Sir Winston Churchill's grandson, who had served for 37 years.

In other words and as we always knew, Brexit is a huge mess and it seems like pigs flying may genuinely be more likely at this point than getting anything agreed by the British Parliament in its current state. 

Which is why soon after Boris lost the vote that ensured a no-deal Brexit will likely be made illegal, he called for a General Election on October 15. 

Awesome! Oh, wait...that vote didn't pass as the main Opposition party (Labour) refused to go to an election. *Probably* a historic first, with politicians not in power refusing the chance to take control. But as ever with Brexit, it's not that simple - the Labour party look likely to back a General Election as soon as the bill outlawing a No-Deal scenario has been ratified (potentially early next week). That said, there are a still a few other ways in which this could all unfold over the coming weeks - watch this space. 

Exciting stuff, but what does this mean from an investment perspective?

Glad you asked - if reading the above made your head a little dizzy, don't worry - most investors currently feel the same as you do. Market participants expect there to be increased volatility in the UK's currency (GBP) which will likely have knock-on effects on UK stocks, creating winners and losers from it all.

And this is before you even think through the real-world long term impacts of a no-deal scenario vs. a soft brexit vs. a remain scenario, etc...

So what happens if GBP gets weaker?

The closer we get to a no-deal scenario, the more the GBP seems to weaken / depreciate.

GBP depreciating is bad for UK companies who sell most of their goodies to the UK domestic market, but need to buy stuff from abroad to make their goods, as it makes those goods more expensive to produce with little chance of being able to pass on all of those increased costs to their customers. Expect these kinds of companies, usually found in the FTSE 250 index, to struggle in the stock market with a weaker GBP. 

In the other corner, GBP depreciating is good for international companies listed on the London Stock Exchange which have operations in the UK but sell their goodies abroad (exporters). This is because their costs of production in GBP become cheaper relative to their revenues which are usually mostly earnt abroad. Expect these kinds of companies, usually found in the FTSE 100 index, to do just fine in the stock market with a weaker GBP.

The opposite also often holds true when GBP strengthens, with domestic / FTSE 250 companies benefiting while FTSE 100 names lag behind.

Ups and downs, indeed.

Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.

Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.

This content is copyright protected by Evarvest Limited (12544579). Evarvest Limited refers to the Evarvest network and/or one or more of its subsidiaries, each of which is a separate legal entity. 

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