The announcement by former US president Donald Trump that he would impose additional tariffs on Chinese goods, potentially exceeding 60%, if he were to win the US election in November, is sparking concern among global investors.
This move, if implemented, could have profound implications across various sectors, causing volatility in financial markets, disruptions in supply chains and fluctuations in currencies.
Sector-specific impact
The technology sector, highly dependent on international supply chains, would face significant challenges.
According to the Information Technology Industry Council (ITI), a 25% tariff on Chinese imports could result in the loss of 934,000 jobs and a decline in the US GDP by 0.3%. Tech giants, reliant on Chinese manufacturing for components, might see increased production costs, potentially impacting their profit margins and stock prices.
The automotive industry, with integrated supply chains spanning the globe, would also witness disruptions. The Peterson Institute for International Economics estimates that a 25% tariff on auto imports could lead to a decline in global trade by US$600 billion, impacting manufacturers, suppliers and consumers worldwide.
Volatility in financial markets
The mere mention of tariffs exceeding 60% has the potential to trigger heightened volatility in financial markets. Historically, tariff announcements and trade tensions have led to significant market fluctuations.
A report by JPMorgan Chase indicates that elevated trade-policy uncertainty has a direct correlation with increased market volatility, affecting investor confidence and portfolio performance.
The CBOE Volatility Index (VIX), commonly known as the “fear gauge,” tends to surge during periods of heightened trade tensions, reflecting the concerns and risk aversion among investors.
A substantial tariff increase would lead to a spike in the VIX, impacting the pricing of options and influencing investment strategies.
Supply chain disruptions
The imposition of tariffs on Chinese goods would reverberate through global supply chains. The manufacturing sector, which relies heavily on Chinese components, would face increased costs and potential delays.
The International Monetary Fund (IMF) estimates that disruptions to global supply chains could result in a 2% reduction in global GDP.
Companies with intricate supply networks would need to reassess their strategies, potentially diversifying suppliers and relocating production facilities.
This restructuring would be expected to lead to short-term inefficiencies, impacting corporate earnings.
Currency fluctuations
Tariff announcements often influence currency values, affecting international investors with exposure to multiple currencies.
The tariffs could lead to a strengthening of the US dollar, which has implications for emerging market currencies, potentially triggering capital outflows from these markets.
According to the Bank for International Settlements (BIS), currency markets have historically experienced increased volatility during periods of trade tensions. Investors holding assets denominated in currencies affected by these fluctuations would likely need to re-evaluate their portfolios and risk-management strategies.
There’s little doubt that the potential of tariffs of more than 60% on Chinese goods as suggested by Trump in a Fox News interview would add another layer of complex challenges for global investors.
They would need to ensure their portfolios are properly diversified across sectors, regions, asset classes and currencies to mitigate the risks and capitalize on the opportunities.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.