Trade brinkmanship – a risky game

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

What’s going on here?

Markets are again under pressure because of escalating trade tensions, after the Trump administration raised the stakes significantly:

  • Harsh rhetoric throughout the spring led to the first actual shot being fired last week, as the administration finalized the initial $50B list of goods, to which 25% tariffs will be attached come 7/6.
  • China immediately responded in like measure, matching tariff levies dollar-for-dollar.
  • Trump responded, asking the U.S. Trade Representative to draw up another list of $200B in imported goods, to which a 10% tariff would be applied, and he promised to continue building on that list should China again retaliate.

Why does it matter?

The tariffs alone are relatively inconsequential for the United States, representing less than 0.2% of the roughly $20T U.S. economy.1 Fiscal policy, through tax cuts and government spending, dwarfs the economic impact of tariffs. China faces greater consequences from these trade barriers, but even so, they fall well short of crippling.

That said, if China retaliates to the latest list, valued at $200B (which they have pledged to do), we would be adding another straw to the camel’s back. With further escalation, the risk of a tit-for-tat process, where the final straw will eventually break the camel’s back, should not be completely dismissed.

From an investor’s perspective, here are the things to watch:

  1. We expect the Trump administration to focus its efforts on China, but similar actions could impact trade relations with other nations – North American Free Trade Agreement (NAFTA) is particularly vulnerable.
  2. For multinational companies with global supply chains, this infuses an extra dose of uncertainty, which could hurt business confidence and lead to more caution on business capital spending, otherwise expected to be an important driver of the economy this year.

Managing risks

The market response has thus far been relatively modest – for good reason. First, fiscal policy provides a cushion to absorb the impact of tariffs. Second, tariffs will take time to come into effect. But, the stakes are now higher, and some pockets in the market are more sensitive than others.

Emerging markets: The emerging markets complex has borne the brunt of the action. Currencies and equity markets are down, bond yields up. We expect this trend would likely continue alongside trade action.

Size: U.S. small caps have been a relative haven from trade rhetoric throughout the year, as they are somewhat insulated from the global economy and the potential damage of protectionism.

Risk assets: Admittedly, the longer the trade issue drags on, the more challenging it will be for risk assets generally, small caps included. Treasury bonds would likely benefit, should we reach a tipping point and experience a severe flight to quality.

1. 25% on $50B is $12.5B and 10% on $200B is $20B, bringing the combined tariffs to $32.5B. That represents <0.2% of the $20T+ US economy.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

Funds that invest in bonds are subject to interest rate risk and can lose principal value when interest rates rise. Interest rates in the United States are near historic lows, which may increase the Fund’s exposure to risks associated with rising interest rates. Bonds are also subject to credit risk, which is the possibility that the bond issuer may fail to pay interest and principal in a timely manner.

Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.

Stocks of small companies may be subject to higher price volatility, significantly lower trading volume, and greater spreads between bid and ask prices, than stocks of larger companies. Furthermore, small-cap companies may be more vulnerable to adverse business or market developments and may have more limited product lines than large-capitalization stocks.

The North American Free Trade Agreement (NAFTA) is an agreement among the United States, Canada and Mexico designed to remove tariff barriers between the three countries.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team

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