Monday 27 January 2020

Feel the fear and invest anyway - despite worries over protectionism


Workers stand on piles of steel rods at a depot on the outskirts of Shanghai, China — steel is one of the targets of Trump’s tariffs Photo: Bloomberg
Workers stand on piles of steel rods at a depot on the outskirts of Shanghai, China — steel is one of the targets of Trump’s tariffs Photo: Bloomberg

Brian Flavin

Protectionism has jumped to the number one position in the long list of worries of investors around the world right now, according to surveys. But how worried should they really be? Investors weren't so worried after they got used to the idea of Brexit - which is essentially another form of protectionism. Investors weren't so worried even after US President Donald Trump was elected on a protectionist-leaning agenda.

And they weren't so worried even when he acted on some of these promises; for example, by withdrawing from international agreements and more recently, imposing tariffs on washing machines and solar cells imported from Asia.

So why are they more worried now? Well, it looks like the Trump administration has upped the ante somewhat. When it imposed tariffs on aluminium and steel last month, it cited national security concerns as a basis for doing so. Last time the US did that was in 1982. After that, the World Trade Organisation (WTO) would have been the main go-to for trade disputes between nations. But national security concerns do not fall under regular procedures under WTO rules, so it looks like a ploy to keep the WTO at bay. And that makes it more difficult for trading partners to respond. Next, Trump turned his attention towards China. He wants to reduce the trade deficit with China by $100bn and is pressing them hard on trade and practices. So, Chinese imports are also being targeted for additional tariffs. To date, the size of the US tariffs and the rest of the world's response to them are in themselves unlikely to have much impact on the global or US economy. But the markets are jittery about what could happen next.

Some of this movie we've seen before. In 2002, then US president George W Bush imposed tariffs on steel imports that lasted for two years, withdrawing after the WTO ruled against them. Trading partners also threatened retaliation back then and it did not lead to a broad trade war. That could be the outcome again.

In this context, the recent market reaction makes sense. Yes, there is some risk aversion. World equities are under a bit of pressure, and core government bond yields have come in a bit. The market is reflecting the fact that we have moved into dispute territory, but not more than that. China has responded to the aluminium and steel tariffs with tariffs of its own on 128 US products and is threatening greater retaliation as the US widens its net. The EU has said it would look to the WTO's dispute process. Negotiations could yet ensue, and some regions may be exempt from the US policies. I think that the market would react more violently if we saw a much broader protectionist push. That would require broad-based tariffs and trading partners responding in kind, probably followed up with more significant actions than we've seen.

For investors, which areas would be at risk then? Let's look at regions first. The smaller open economies in Asia and Europe would certainly be at risk, especially those with high exposure to the US. That includes Ireland. Also, the US seems to be targeting countries that have large trade surpluses with it. So, you could add larger and relatively less open economies like China, Japan and Germany to that list.

Second, looking at sectors of the equity markets. The losers would likely be those industries that account for the highest share of trade around the globe, more so if their products lack something unique. In addition, industries with high shares of US imports would be more susceptible to rising US led protectionism. I believe industrials (cars, machinery), materials (metals, textiles, paper, rubber) and technology would be the equity sectors affected most.

But before anyone gets too worked up, bear in mind that we are still some way off a broader protectionist push. Trump's bark has generally been bigger than his bite. Should that remain the case, then it is the underlying economic conditions that should matter more for overall trade growth. On that score, the outlook is positive. For investors, it's a case of feel the fear, and invest anyway.


Brian Flavin is senior equity research analyst with Goodbody (

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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