Tariffs and Trade Wars: How Will Emerging Markets Fare?

By Nathan Chaudoin - March 9, 2018

On March 1, President Trump announced the U.S. would set two tariffs: 25 percent for steel imports and 10 percent for aluminum imports. These could take effect as early as this week. The White House announced that the tariffs would be applied broadly, without targeting specific countries and import quotas. First proposed by the U.S. Department of Commerce, the tariffs' main goal is to help improve the utilization rate of U.S. steel makers, from the current 72 percent to 80 percent. The department sees the latter as the rate needed for the long-term health of the industry.

No Trade War Expected

The proposed steel tariff is likely to have little effect on China, whose steel exports to the U.S. account for only 1.1 percent of China's total steel export1, and 2 percent of total steel imports into the U.S.2 Growth in emerging markets (EM) and Asia remains on solid ground. Unless these U.S. trade tariffs lead to major retaliatory actions from other countries, especially China, we do not see any major downside risks in the emerging markets, given the healthy state of domestic activity and growing regional trade activity.

Are We Worried about EM?

Last week's correction in emerging markets was driven by the U.S. rate cycle; EM fundamentals have not materially changed. The outlook for EM continues to strengthen. The negative equity market response reflects markets trying to price the risk of escalated US protectionism, rather than this specific tariff. There is strong global growth, and a widening gross domestic product (GDP) growth of EM relative to developed markets (DM). There are also continued positive revisions to EM earnings growth. We think valuations are attractive on a relative basis to DM.

We don't expect higher U.S. rates or inflation to derail EM equities. We will manage risk related to U.S. policy, such as the impact of Mexico and NAFTA negotiations on growth and slowing domestic demand.

How Might China Respond?

We believe a full-blown trade war is unlikely. If China responds, the response is expected to be measured, not confrontational. For example, China could impose retaliatory tariffs on U.S. exports to China such as soybeans and automobiles; delay trade and investment deals; weaken its currency; or slow the purchase of U.S. Treasury bonds.

When Should We Start to Worry about Tariffs?

While we're not worried about tariffs on steel and aluminum in emerging markets, any tariffs on electronics would likely have spillover effects on the supply chain, including companies in Korea, Japan and Taiwan. Furthermore, tariffs are generally inflationary as they add to price pressures. As a result, we think the Federal Reserve may be more likely to hike four times this year.

Nathan Chaudoin
Nathan Chaudoin

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      1 International Trade Administration. (2018, March). Global Steel Trade Monitor: Steel Exports Report - China . Data from Jan.-Dec. 2017.

      2 International Trade Administration. (2017, Dec). Global Steel Trade Monitor: Steel Imports Report - United States  . Data from Jan.- Sept. 2017.

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