While many of the details of the US Government’s proposed trade tariffs directed at China (aimed at reducing the US’s trade deficit with China) and China’s reciprocal tariffs, are yet to be made public, the immediate response is to increase uncertainty for investment markets.
Investment markets have initially interpreted a break out of a trade war as being negative for growth and as being inflationary.
In Harbour’s view, the impact on growth and inflation in the US and Chinese economies may be modest given the large domestic economies within both countries. While external trading remains important to China, its domestic economy has been the engine for economic growth over the last few years and is likely to remain so.
We see some comparisons with the US-Japan trade tariffs brought about by President Regan during the 1980s – while uncertainty increases, the ultimate impact on economies is muted at an overall level.
But at an industry and company-specific level, the impact of trade tariffs may be significant.
New Zealand and Australian economies and companies may benefit from some of the changes.
For example, moves by China to increase tariffs on US agricultural products may see New Zealand and Australia benefiting from substitution, at least in the near term. Again, if China were to increase tariffs on US produced dairy products, it may see Chinese consumers switch to New Zealand and Australian produced dairy products.
If these actions do contribute to lower economic activity, more cyclical parts of the economy and activity sensitive companies may underperform. Conversely, quality growth companies may do relatively well – sectors which Harbour equity portfolios remain positively skewed to.
Investors are continuing to learn how the Trump-led US Government operates. As US Treasury Secretary Steven Mnuchin stated, “we’re not afraid of a trade war, but that’s not our objective,” further adding “in a negotiation you have to be prepared to take action.” 
While a potential extended trade war would be a headwind for economies and capital markets, there will be opportunities to enhance portfolio returns where there are beneficiaries and losers from policy changes.
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