On June 1, the US began applying a 25% tariff on steel imports and a 10% tariff on aluminium imports from the European Union, Canada and Mexico, having giving them an initial reprieve on the tariffs it applied to the rest of the world on March 23.
The imposition of the tariffs triggered a rapid response with the EU announcing their own set of retaliatory tariffs on up to €2.8 billion ($3.3 billion) of US exports and Canada imposing trade duties on up to $12.8 billion of US products, both effective from July.
The latest round of US tariffs follow the 30% tariffs applied to solar panels and the 20% to 50% tariffs on washing machines and components announced in January, and the tit-for-tat implementation of duties between the US and China in March and April, which covered products such as aluminium, airplanes, pork products, flat-panel televisions, medical devices, and soy beans.
We asked two chief investment officers and a senior investment strategist how the growing US trade protectionism might impact Asian markets and how investors should respond.
Their comments below have been edited for brevity and clarity.
Jang Dong-hun, chief investment officer
Public Officials Benefit Association, Korea
In the near future the G10 or G7 [group of wealthy countries] needs to reach a consensus to deal with these kinds of populism or protectionism issues, otherwise [further escalation] is inevitable.
I think the trade war is not finally confirmed. It is an ... ongoing issue, so we have to see what is the final result. And also half of our portfolio is in alternative investments [and] ... pretty much focused on Western countries such as the United States and the European market, so those are not as affected by the trade sanctions. Well, they will be a bit affected, however ... not directly ... We'll have to see if there is anything sensitive to the sanctions, then we'll have to respond. However, these days, we do not see anything special or very sensitive yet.
Definitely it affects Asian markets very negatively as a whole, especially the more export-oriented economies such as Taiwan and Korea. Those two countries also have a very strong dependence on their exports to the China market. One of the main targets of the US tariff protectionism is mainland China, so the side effect will heavily [and] negatively influence Taiwan and Korea. Those trade barriers will negatively affect the Korean economy and our investments in the long run, not the short run ... Listed equities is a part of our whole portfolio, so if we think those industries or listed companies will be negatively affected, then we could move on to other sectors or other industries. I'll say in the longer term they will definitely have a negative effect.
I don't find any good opportunities from the tariff measures. It's hard to justify a positive effect on our economy.
Daniel Morris, senior investment strategist
BNP Paribas Asset Management, London
So far what's been imposed are just tariffs on steel and aluminium imports, so the most obvious countries or sectors that suffer are those sectors outside of the US. Whatever the steel and aluminium producers in the US gain, that's a loss then for those producers outside of the US. But then there's the flip side. You think about automobile manufacturers, motorcycle manufacturers, transportation equipment, things like that, that are consumers of steel. It's the US consumers that suffer because now they're paying higher prices than they did before, whereas those sectors outside of the US will actually benefit.
One of the sectors that's most obviously vulnerable is actually technology because for both the US and for China, that's the sector that these countries sell the most to the other. On the one hand, it's the most vulnerable because that's where there's the most trade between the two markets, but maybe because it's so important, each country would be supposedly more reluctant to put tariffs there because the damage would be that much greater.
If you're an investor at this point, what should you do? You'd be biased towards non-tradable sectors overall and ... towards markets that are generally speaking less exposed. So you would have a bias towards service sectors, like real estate, which you don't trade across borders generally, or utilities, or to some degree consumer discretionary items, though again you probably want ones that are more focused on each country's domestic market.
And then you'd also think about markets that are less trade-sensitive. So you'd think about India, which is a less exposed country in terms of trade because it has a huge domestic market to support its equities, compared to Singapore or Taiwan -- these small open countries that depend a lot on trade. So this environment of higher trade tensions suggests you want to move towards larger, less trade-sensitive markets, and also more services in domestic-oriented sectors.
Fundamentally, what they want is lower tariff barriers. Tariffs for goods that are imported into the US are by-and-large much lower than the tariffs that US goods face when they're exported elsewhere. Perversely, this could be trade-positive because if this works, if they lower their tariffs in the end, then I think America won't impose any tariffs itself, or minimal ones, and then you actually get lower tariffs elsewhere.
So there's kind of an optimistic outcome at the end of this where you actually have a reduction in tariffs, and then you have the much more pessimistic outcome, where you have a trade war, and you end up with a reversal, to some degree, of globalisation. It's quite challenging what would be the odds of each one at this point. It's just too uncertain, and the Trump administration's responses have just been too unpredictable.
Timothy Orchard, chief investment officer for Asia Pacific ex-Japan
Fidelity International, Singapore
We have argued in the past that generally in the face of increases in US interest rates, we've actually done quite well, so I have not been concerned about that. The problem with tariffs is that it raises the spectre of interest rates rising for the wrong reason because tariffs are inherently inefficient and they raise prices for a given level of output.
If the central banks are forced to raise interest rates in response to that cost and push inflation, then you have got interest rates going up for the wrong reason.
We actually haven't seen that in a long time, so what worries me the most about a potential trade war is that markets might underestimate the impact of it on some of these macro variables. So generally, rising rates are good for this region because they reflect demand-pull inflation. If it's cost-push inflation caused by tariff increases and huge trade barriers, I think that argument potentially is in trouble ...
So that's the thing that worries me. That's what investors should be focusing on -- just how out of control this becomes. I think the impact if it accelerates very significantly could be quite negative.