Why US equities may start feeling the pinch of Trump’s protectionism

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The U.S. stock market may have chugged along despite rising fears over the Trump administration’s escalating trade war, but China’s ability to retaliate may soon take a harsh toll on Wall Street, Capital Economics said in a note last week.

“Stock markets in China and Emerging Asia would probably be worst-affected again. But in developed markets, we suspect that U.S. equities would prove less resilient than they have done so far,” Oliver Jones, markets economist at Capital Economics, said in a note last week.

Until now, the broader index has performed fairly well, but the share prices of firms most vulnerable to protectionist measures, including makers of cars and semiconductors, have plunged since mid-June, when U.S. President Trump approved tariffs on US$50 billion of Chinese imports and threatened to extend them to another US$200 billion worth, Jones noted.

But while further U.S. tariffs on Chinese imports wouldn’t come as a surprise, China’s retaliation could weigh heavily on U.S. stocks, Jones said, adding that even the support from the general health of the U.S. economy was likely to fade.

“While China has already announced that it will respond with its own duties on a lesser value of U.S. goods, we suspect that it will also increasingly resort to (probably unannounced) nontariffs measures designed to make it more difficult for U.S. multinationals to operate in China,” Jones said.

“The scale of U.S. multinationals’ operations in China is substantial. Indeed, it is far larger than that of Chinese multinationals in the U.S. So if China does start to respond in this way, we suspect that the U.S. stock market as a whole would come under pressure,” Jones said.

The Trump administration reportedly could impose its proposed 25 percent tariff on US$200 billion of Chinese imports in the coming days. Trump has since threatened to impose tariffs on all imports from China, with the mainland set to swiftly retaliate.

That comes as Bob Woodward, of the famed Woodward and Bernstein pair who broke the Watergate scandal and unseated President Nixon, published a book about the Trump administration, titled, “Fear.” One anecdote in the book is that Trump, while editing a then-upcoming speech after the G20 summit, scribbled his thoughts, writing “TRADE IS BAD.” The note was reportedly reproduced in the book, which noted that while Trump never spoke the words, they appeared to be the “truest expression” of his protectionism and isolationism.

 

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