Homepage / Asia / Trump may be about to wallop global trade as we know it, but markets don't seem to understand
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Asia

Trump may be about to wallop global trade as we know it, but markets don't seem to understand

President Donald Trump’s administration is poised to announce what could become a major effort to strike out at China for its trade practices, but the stock market rally this year hasn’t even hiccuped.

The announcement is set for Friday and will reportedly use part of the 1974 Trade Act, Section 301, which allows the U.S. Trade Representative and the president wide latitude in imposing punitive measures. Those may including tariffs and import quotas if an investigation finds violations of trade rules.

Deborah Elms, executive director of the Asian Trade Centre, told CNBC that the potential damage could be “huge.”

She described Section 301 as a “powerful tool,” retired in the mid-1990s because it “irritated” the international trade community as it was viewed as both unilateral and unfair.

“If we get to the end of [the Section 301] process 12 months from now, there can be a lot of damage caused,” she said, adding there was a second risk that during the process, China would make business difficult for U.S. companies there.

Elms also pointed to a third risk: Using Section 301 could upset the global community, which over the past six months has already begun to turn away from policies viewed as favorable to or started by the U.S.

But while global trade is facing major upheaval, the S&P 500 index, despite its constituents getting nearly 50 percent of their overall sales from foreign markets, closed just shy of its record closing high on Wednesday.

The Dow Jones industrial average also closed over the 22,000 level for the first time on Wednesday.

Mark Matthews, head of research for Asia at Bank Julius Baer, told CNBC that markets just don’t seem particularly interested in politics.

“So much of what the administration has said, it hasn’t done,” Matthews said. “I’ve read several comments from investors that they’re just really not listening to what’s coming out of the White House anymore.”

He said the trade announcement could be “bluster, rather than something they’re really going to do.”

Matthews also noted that the U.S. may not be driving China trade as much as it once did, with the mainland’s trade growth potentially coming from other sources.

Indeed, in February, Capital Economics estimated that if all trade between the U.S. and China halted immediately, China would only face a dent of around 3 percent of gross domestic product (GDP), including knock-on effects to employment and consumer spending.

There was another reason that stocks weren’t reacting much: Investors were likely watching corporate earnings.

For calendar second quarter, 72 percent of the S&P companies that had reported as of Wednesday morning beat bottom-line expectations and 68 percent on the top line, according to data from Thomson Reuters I/B/E/S.

Elms said she expected that eventually stock markets would have to respond to trade frictions, but she also noted the move in the U.S. dollar was likely reflecting those concerns.

The dollar index, which measures the greenback against a basket of currencies, has fallen to as low as 92.885 this week, from as high as 103.820 in January.

“The dollar story is partly because foreigners get this problem. I’m not sure domestic investors quite grasp it,” she said.

On the other hand, Matthews said the dollar’s drop was partially due to the political chaos within the Trump administration.

“People had expected policies to accelerate economic growth to come in by now,” Matthews said.

But he also noted other factors had been weighing down the dollar, including inflation remaining low, which wasn’t “conducive” to the U.S. Federal Reserve boosting interest rates, and a stronger-than-expected economic recovery in Europe.

Others attributed the markets’ sanguine reaction to the expected trade announcement to another reason entirely: A lack of surprise.

“This is one of Trump’s campaign promises. He said exactly that they were going to take action on technology transfers when it comes to China,” Steve Okun, vice chairman of the Asia Pacific Council of American Chambers of Commerce, told CNBC.

The Trump trade announcement was set to focus on allegations that Chinese companies were violating U.S. intellectual property, in part by pressuring American companies to share trade secrets or cut licensing fees for patents, according to a report from the New York Times on Tuesday.

“There is support in the broader business community,” particularly on addressing the technology transfers, Okun said.

While Okun added there was some concern on how that would be done and what the next steps would be, he noted it was too early to tell if the process would result in punitive measures or just an agreement on a “going-forward” basis.

—CNBC’s Fred Imbert contributed to this article.

Source: cnbc china
Trump may be about to wallop global trade as we know it, but markets don't seem to understand

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