Stresses in international economic relationships increase risk of a global trade war

Newton multi-asset manager, Paul Flood, has warned that a full blown trade war could hit global markets, growth and investors, as the economic relationships between the US and China, the US and the EU, and the EU and the UK are changing.

In March, the Trump administration announced tariffs of 25% on steel and 10% on aluminium imports from China, which led to China retaliating with its own tariffs on US imports. Meanwhile, the UK is seeking to set up 40 trade arrangements with 70 countries by the end of its transition period for leaving the EU.

Flood said he ruled out soaring inflation but added: “If we do get a trade war and rising inflation it will most likely be driven by ‘bad’ inflation that puts extra costs onto consumers, rather than more positive wage inflation. To some extent everybody would be a loser in a trade war but in particular, consumers will be hardest hit.”

In terms of beneficiaries, Flood said that sectors that previously lost out, such as US steel makers, could do well. “This would, in turn, fit the narrative of the US administration’s ‘America first’ agenda quite well,” he adds. Another result could be inflows into “safe haven” fixed income assets, if market volatility and economic uncertainty rises. However, he added that the US Federal Reserve is well-equipped to cope with any financial pressures and the US economy is well placed for future growth. “While there are some genuine concerns trade barriers could interrupt business sentiment, domestic tax cuts and accelerated depreciation look likely to increase capital expenditure in the US, with some parts of the economy expected to continue to grow. If this is the case then economic growth could surprise, and favour risk assets,” he concluded.