The existing setup in the Asian supply chain is built on an abundant labor force and improving infrastructure. It has helped foster industrial clusters that operate efficiently at a large scale and enable multinationals to expand margins and keep prices low for US consumers. We believe US consumers would ultimately bear the brunt if there were any change in these dynamics.

We also believe the impact from heightened trade tensions will likely be felt more negatively among markets, including South Korea and Japan, that are an integral part of the supply chain. They depend more heavily on exports as a growth driver and are traditionally US allies in the region.

No one wins in an integrated world

Though the spotlight has been on China, we believe the US economy and corporations will be adversely affected by tariffs as well. The US equity market fell by more than 2% upon the measures released on March 22,4 with Caterpillar and Boeing among the biggest losers.

Agriculture and aircraft are among the US sectors with the most exports to China, and they are particularly vulnerable to counter measures from the country — for instance, if China were to increase purchases from Airbus rather than Boeing.

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Conclusion

We believe the current trade issue between China and the US will continue to weigh on investor sentiment, keep the market nervous and raise near-term volatility. However, our base case assumes that China and the US will resolve the dispute through ongoing negotiations rather than move toward a full-fledged trade war.

On one hand, China has been enhancing regulations in areas in which the US is critical, such as protection of intellectual property, and is willing to further open up domestic markets and increase imports. On the other hand, there are still different voices among top US politicians.

Many US corporations have vested commercial interests in China as the country is growing into a more affluent economy. We believe it is in both sides’ interest to further negotiate and eventually agree on terms that can lead to a win-win situation.

Learn more about the ways Invesco Greater China Fund seeks long-term capital growth.

This article has been republished with permission from Invesco Powershares.