Growing up, I was a fan of the Choose Your Own Adventure books.
If you are not familiar with the series, the reader is the main character. As the main character, you are in charge of what happens in the story.
The way the books do this is by introducing a storyline, which moves along until you reach a crossroad. You then need to make a choice to keep on reading.
Your choices will have different consequences…and endings.
The ‘wrong’ choice could set you back to where you started…or worse. It could lead you to a premature (and usually very creative) death.
Much of what I liked about the books was that there was no clear right or wrong choice.
Any decision you made could have very unpredictable consequences.
The reason for this was that you didn’t know all the facts until AFTER you made a decision. You had to make a choice with the little information you had at hand.
As they say, hindsight is 20/20…
So, you try to make what you think is the best choice for the situation, with the limited amount of information you have.
Sometimes, this would lead you to the best possible outcome. But often it didn’t.
Much like in life and investing, you try to interpret the world around you and make decisions based on the small window of information you have available.
Right now, economists are trying to determine the likelihood, and consequence, of a possible trade war between the US and China…with the limited amount of information we have.
Trade war talk between the US and China has been heating up recently.
The current status of the trade war
Last month, the US imposed tariffs on steel (25%) and aluminium (10%). They temporarily suspended tariffs for the European Union, Argentina, Australia, Brazil, Canada, Mexico and South Korea.
But not for China.
Over the weekend, China retaliated…with more tariffs.
China has imposed duties on 128 imports, worth US$3 billion.
The tariffs affect mostly agricultural products, a hit at the sector that voted for Trump. They include wine, pork, fruit, nuts and other products.
China says the measure is a way to pressure the US to back down from a trade war.
While there is a lot of indications that they are both on the trade war path, both parties so far are taking relatively cautious steps. Which could indicate they are just warming up to induce negotiations.
As we told you back in March, the US imposing steel and aluminium tariffs doesn’t really affect China. Chinese aluminium exports to the US make up only 2.1% of China’s production. And steel exports are just 0.2%.
The same goes for China’s recent move.
They haven’t targeted the big ticket items like soybeans, aircrafts and vehicles.
But, in saying this, things could escalate quickly.
The US is now looking to impose tariffs on about US$60 billion of Chinese imports as they accused china of stealing US intellectual property.
According to the Office of the US Trade Representative, the US currently imports US$478.8 billion from China while US exports to China were worth US$169.8 billion.
The US following through with these tariffs would impact about 12% of China’s exports into the US.
That would be a big hit.
It is likely China would also retaliate with another big hit, maybe even target one of the big ticket items.
How could the trade war affect the economy?
How could a trade war affect us?
Well, KPMG economics has tried to model several scenarios.
According to them, a 5% increase in tariffs by all countries on manufactured goods would slow the global economy by 1.3%. The European Union, the UK and Canada would enter a recession and Australia would see a drop in growth by 0.8%.
This is the least worse-case scenario.
If all countries impose tariffs by 10%, the world could enter a severe recession. This could decrease Australia’s GDP by $35 billion.
As KPMG research shows, while all countries lose under the tit-for-tat escalation, the US economy would be the one to lose the least. While Canada and Europe would lose the most.
As Brendan Rynne, KPMG Australia Chief Economist warned:
‘Our modelling shows that countries would be wise to consider how to respond to any import tariffs implemented by the US.
‘While all countries lose under these scenarios, the US lose by considerably less than others do.’
While China and the US look open to negotiate, the outlook could definitely change quickly. That is the thing with trade wars…
Tensions could fizzle out as both sides negotiate a solution.
Or we could see an escalation as both sides increase their responses…and the world’s largest economy decides to confront its up and coming competitor.
A full on trade war could lead the world into a recession.
Meanwhile, YOU as an investor try to choose the best option to protect your portfolio. You and YOU ALONE are in charge of safeguarding it.
If you think a trade war won’t happen…move on to the next article.
If you think there is a real possibility of a trade war, and want to add some insurance to your portfolio by buying gold, click here.
Editor, Markets & Money