Global financial markets had been watching the US President’s escalation of trade disputes, largely from the sideline, thinking it is part of his “The Art of the Deal” negotiating tactics. However, recent developments have the very real prospect of developing into a lengthy trade war between not only China, but others including traditional US allies Canada and the EU.

China exports more to the US than it imports, so many think they have more to lose from a trade war. However, much of what the US imports from China is currently not made in the US. The theory is, tariffs on Chinese products will propel more things to be made in the US. This might be difficult with the US unemployment rate at 4%. Will there be enough workers to make it all at home?

The first set of tariffs on China have been calculated to have minimal damage on the US. Mobile phones for example, were omitted. China retaliated announcing its own tariffs. Then, the US added another round of tariffs on more goods (US$200b announced on the 10th of July). With each step up in tariffs, the impact on both economies rises, adversely affecting the global economy. A breakdown of US imports from China is shown below.

In this part of the world, we trade more with China than the US and hence, have more to lose if China is the loser of a trade war. According to Stats NZ, China is New Zealand’s largest buyer and seller of internationally traded goods. Unlike the US, New Zealand has a healthy surplus with China. Milk, wood and meat make up the bulk of the exports, so these should be relatively insulated from any impact since these are largely consumed within China.

Australia on the other hand, could lose more, despite also having a healthy trade surplus. In the year to June 2017, Australia exported A$110.4b of goods and services to China (29.6% share) and imported A$64.3b (17.7%) (Source – Department of Foreign Affairs and Trade). Almost half of the exports were iron ore which is used to make steel. Much of this steel ultimately gets exported as a finished good. If China slows down its production of steel, then this will have an impact on the price Australia receives for its iron ore, adversely affecting the country’s finances.

We also have to think about any flow on impacts that could affect the broader global economy. US inflation would pick up as the tariffs act like a tax on goods, and economic growth would likely slow down. Yet, it could result in quickening the pace of interest rate tightening in the US. In China, the Government has regularly shown its readiness to loosen policy to ameliorate any slowdown. This could include more infrastructure spending helping to lift steel demand that may have fallen from lower exported goods. Hence, there could be both positives and negatives.

Even if a full blown trade war is averted and deals can be done, it now seems certain that the current US Administration is focussed on trying to make China the “bad guy”. Maybe China and the EU work closer together isolating the US? Hence, all investors need to consider such possibilities even when opportunities present themselves.