If the first week of the April is anything to go by, the second quarter of 2018 is set to be another busy one for the financial markets. Trade war tensions are at the center of every headline thanks to a ‘tit-for-tat’ escalation of tariff disputes between the U.S. and China. The announcement on April 6th that China would retaliate to President Trump’s latest tariff propositions took the markets by surprise. Delivered just two days after the U.S announcement, it was an uncharacteristically speedy move for Beijing and carried a very determined message: China will fight Trump tariffs “to the end.”
China’s strong stance comes hot on the heels of President Trump’s very determined attempts to distance himself from culpability, should a trade war ensue. His April 4th Tweet – “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!” – was not only an attempt to pacify jittery investors, but also laid the blame for current tensions squarely at the feet of his predecessors. The rhetoric from the White House is that this administration is fixing a problem, not causing it.
But the markets are not as easily pacified as the Trump heartland. While the President is correct that the current situation does not yet constitute a trade war, investors are increasingly concerned that this public dispute heralds one.
We have already seen increased volatility across global stock markets this week, suggesting that traders expect corporations to feel the effects of the trade dispute and are pricing in that eventuality. While this remains a suggestion (for now, at least), many international corporations will need to begin forecasting capital expenditures and production lines. Erratic behavior in the stock markets can be seen as the psychological impact of such trade tensions, despite a lack of legislative action from either government.
So far, we have not yet noticed a material impact in the FX markets, but the longer this tension drags on, the more at-risk the currency markets will become. If the dispute between Trump and China escalates further, investors will need to assess what impact the spat could have on economic growth. Once this assessment is made, we will likely start to see the currency markets follow the volatility already apparent in stocks.
If public posturing and strong words are anything to go by, neither President Trump nor China are willing to back down. This could spell disaster for negotiations. My personal opinion is that the United States is the most likely to suffer lasting damage from this dispute, with investor confidence wounded at the very least. A weaker Dollar will potentially mean trouble for the AED Dirham as well.
From an economic standpoint, I would be surprised if the U.S.-China tensions impacted the Gulf region immediately. Longer-term, the rise of protectionist policies has the potential to derail global growth, sparking a slow-down in international trade that would negatively impact many economies across the world, the UAE included.
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