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Trade Tensions Escalate as Trump Raises Tariff Threat Again

5 August 2019EconomicsPoliticsUSEmerging Markets

President Trump said the US will add a 10% tariff on remainder of US$300bn on Chinese imports starting September 1. Citi analysts estimate the tariffs may drag down China's GDP growth by -0.5pp and US and global growth by around -0.1pp and -0.2pp respectively. With the pending tariffs now including consumer goods, the cost paid by consumers could directly increase and US core inflation is expected to inch up.

Could markets underestimate the unintended consequences of trade friction? While manufacturing and trade are not the largest shares of global business activity, they are however, among the most cyclical and impactful to corporate profits. Unless special exemptions are carved out, an imposition and potential escalation of the latest tariffs could impact US retailers and US technology products. Global firms with exposure to China, such as US semiconductors, could also see some vulnerability.

Trade Tensions Escalate as Trump Raises Tariff Threat Again

Past performance is no guarantee of future results, real results may vary. Forecasts are expressions of opinion, are not a guarantee of future results and are subject to change.

Trade confrontation is likely to stay. Citi analysts believe trade confrontation could be a regular feature of the global backdrop, possibly for years to come. A US trade conflict with Europe focusing on the auto industry seems highly likely at some point.

Markets may overshoot as uncertainty rises, and unintended consequences of trade disputes may be significant. As such, Citi analysts remain balanced across all asset classes and regions, erring on the cautious side, with an overweight to US high quality fixed income and underweight to global equities. A focus on high quality income producing assets in both equities and bonds is preferred.

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