There’s been a lot of talk and some action on trade from the Trump administration. How significant is the trade picture to emerging markets, how concerned should investors be that trade war rhetoric will escalate?

The trade talk isn’t new. The Trump administration raised tariffs on solar panels and washing machines in January, then announced tariffs on aluminum and steel imports of 10% and 25%, respectively, in early March.

While the move to increase tariffs on these products raised concerns about a full-blown trade conflict, they aren’t necessarily concerning in and of themselves. These products account for 4% of total U.S. imports, or half a percentage point of U.S. gross domestic product (GDP). As long as retaliatory measures from trade partners are less than proportionate, which is what we have seen so far, the impact of these measures will likely be limited. Moreover, underlying global demand conditions are currently so strong, they will likely have a favorable effect on trade growth, potentially offsetting these measures.

Then, in early March, Gary Cohn, Trump’s top economic adviser, resigned amid a disagreement over the steel and aluminum tariffs, which Cohn opposed.

The trade protectionist hawks in the Trump administration are gaining the upper hand regarding policy.

Cohn’s resignation unsettled the markets, and for good reason: It indicates that the trade protectionist hawks in the Trump administration are gaining the upper hand regarding policy.

This raises the possibility that a more aggressive trade-policy stance will emerge from the Trump administration, potentially leading to increased trade conflict in the form of escalating tit-for-tat tariffs and trade sanctions. This would further unsettle global markets given the potentially negative implications for global growth.

Indeed, shortly after Cohn resigned, the Trump administration made a number of protectionist trade announcements, the largest being tariffs on $60 billion of Chinese goods and a demand that China reduce its trade deficit with the United States by $100 billion.

China responded by targeting $3 billion of U.S. exports to China. This is a relatively measured response, which is to be expected: It is not in China’s interest to escalate the trade spat dramatically at this point.

There is a negotiation tactic embedded in the threatened tariffs.

Moreover, based on how the Trump administration has promoted the recently announced steel tariffs and possible exemptions for certain countries as dependent on upcoming trade negotiations or the removal of market-access issues the United States has had with various countries, I believe there is a negotiation tactic embedded in the threatened tariffs. They are designed to extract concessions the United States seeks. In this respect, the announcement of a bilateral trade deal with South Korea provides an illustration of how the administration is using the tariffs as a negotiation tactic.

One can only hope that this tactic is being used with China, and that some kind of negotiated settlement can be worked out before the situation escalates further. But given the rapid ascendancy of the foreign policy hawks within the Trump administration after the departure of Gary Cohn, we must concede that there is growing risk of a growth-destabilizing trade conflict between the world’s two largest economies. And the market has begun to price that growing concern into risk assets.

Todd McClone, CFA, partner, is a portfolio manager on William Blair’s Global Equity team.

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Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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