<p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">The trade war between the US and China has escalated with tic-for-tac moves. We highlight the recent trade moves from both countries and discuss lessons from past trade wars.</span><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"></span></p><p><b><span style="text-decoration: underline;"><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">1. Tic-for-tac trade measures</span></span></b></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">The trade war between the US and China is showing signs of deepening. Both sides are imposing trade tariffs on each other in tic-for-tac moves. </span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">The first salvo was made by the US with taxes on steel and aluminium last month. </span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Earlier this week, China imposed tariffs on 128 US imports amounting to US$3bn in response to the steel and aluminium taxes.</span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">This tariff move was retaliated by the US on Tuesday. 25% taxes are proposed on 1300 technology, transport and medical products in China. In the press release, it states that the list is in response to alleged unfair trade practices that resulted in technology transfers from US companies to Joint Ventures for entering into the Chinese market. There were also allegations by the US government on Chinese trade espionage practices. Consumer appliances such as refrigerator, washing machines and mobile phones are exempted from this list. This is to minimize the impact on US consumers. </span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">China is not backing down from the latest US trade tariffs. Today, China has announced 25% tariffs on a new list of US goods. These taxes amount to US$50bn and are levied on 106 products ranging from soybeans, aircrafts, chemicals and aircrafts. </span></p><p><b><span style="text-decoration: underline;">2. The 1930s Smoot-Hawley trade war </span></b></p><p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3">The first instance of trade war in the 20</span><sup><span style="font-size: small;" size="2">th</span></sup></span><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"> century occurred in 1930. Under the Smoot-Hawley Tariff Act, the US imposed import tariffs on more than 20,000 goods to protect US industries. US President Herbert Hoover imposed these tariffs to protect the US economy. However, it triggered adverse trade retaliations from other countries and resulted in a sharp decline in trade volumes. The import tariffs came several months after the 1929 stock market crash and further worsen the Great Depression in the country. </span></p><p><b><span style="text-decoration: underline;">3. The 1980s Japan trade war </span></b></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">In the 1980s, there was a trade war between US and Japan. Japan was the rising economic powerhouse and the US President Ronald Reagan levied trade restrictions on industries such as steel and automobiles. This include voluntary restraints on car exports amounting to more than 60%. Large Japanese auto manufacturers such as Toyota and Honda were pressurized to set up manufacturing facilities in America. Despite the trade war, the economy continued to chug along and was less affected compared to the 1930s Smoot-Hawley trade war. </span></p><p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3">The current trade war is evolving to a game of chicken between both US and China (<a href="media/our-media-coverage/game-of-chicken/"><span style="color: #1f4e79;" color="#1f4e79">https://castle-familyoffice.sg/media/our-media-coverage/game-of-chicken/</span></a>). There could be more posturing from both sides. The Presidents from both sides in Trump and Xi have strong personalities and are unlikely to back down so easily. Therefore, we do not expect resolution to be speedy. </span></span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">A mild trade war could be analogous to the 1980s Japan trade war where the economy continue to do well despite these trade barriers. There are also shades of similarity with China replacing Japan as the “trade nemesis of the US. </span></p><p><span style="font-size: medium;" size="3"><span style="font-family: Calibri;" face="Calibri">The other scenario is a full-blown trade war akin to the 1930s Smoot-Hawley trade war which resulted in a serious blow to the global economy. </span>OECD estimates that global GDP would dropped by 1-1.5% with a permanent 10% rise in trade costs. <span style="font-family: Calibri;" face="Calibri">The effects from a full-blown trade war could lead to market correction with a</span> break of S&amp;P 500 Index below 2550.</span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Trump initiated this trade war as he is looking to reduce the US trade deficit with large export countries. A full-blown trade war may not reduce the trade deficit. Instead, it could add deficit to US economic growth and to Trump’s popularity.</span><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"></span></p><p><strong><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Edmund Chan, CFA</span></strong></p>