The emergence of a US-China trade war (via the threat of tit-for-tat tariffs) has, not surprisingly, spooked investors and led to heightened volatility in global markets in recent weeks. The feud began in March when Trump announced a plan to tax steel and aluminium from China and other countries. Since then, he has threatened to impose tariffs on other products, such as appliances and electronics. China has made similar threats about American cars, wine, soybeans and other items.

Trump recently raised the stakes when he said he had directed the United States Trade Representative (USTR) to consider an additional US$100b tariff following China’s decision to retaliate against an earlier US$50b worth of proposed tariffs. China, whilst making it clear it doesn’t want a trade war, responded by saying it would do whatever is necessary to protect its interests.

The underlying rationale for the US tariffs against China is believed to be to punish China for its intellectual property practices. US officials have accused China of using unfair trade practices, as well as employing coercive tactics, to gain access to American intellectual property. This follows an investigation launched by the USTR under Section 301 of the U.S. Trade Act of 1974, which allows for the unilateral imposition of duties in retaliation to unfair trade practices. The US alleges that China has been stealing US intellectual property, forcing American companies to hand over proprietary technology as a condition of doing business in mainland China, and providing state support for Chinese firms to acquire important technology abroad.

Trade between the United States and China is valued at nearly US$650 billion a year, with the United States importing far more than it exports. Clearly Trump is seeking to level the playing field but the stakes are very high as a global trade war would likely be devastating for global growth and have a detrimental impact on asset valuations, including equities.

Even as the rhetoric heats up, there is a widespread belief that Trump’s economic team is in talks with China’s trade officials looking for an amicable solution, although Chinese officials deny that such talks have commenced.

Whilst we continue to ascribe a low probability that a fullscale trade war eventuates, we are keeping a close eye on policy developments out of Washington and Beijing and will shift the portfolio to a more defensive stance should the situation escalate.