If the tariff-for-tariff tradeoff between the United States and China resembles a mere scuffle, multinational investment bank J.P. Morgan expects it to escalate into a full-blown trade war. The firm lowered its ratings for Chinese stocks from neutral to overweight, citing that the trade wars will heighten to a point where its economy is substantially impacted.
“A full-blown trade war becomes our new base case scenario for 2019,” emerging market strategist Pedro Martins Junior said in a note. “There is no clear sign of mitigating confrontation between China and the US in the near term.”
Related: Japan ETFs Brush Off Escalating Trade War Fears
Last month, U.S. President Donald Trump announced his administration was moving forward with imposing a 10% tariff on $200 billion worth of Chinese goods that includes a step-up increase to 25% by the end of the year. The administration moved forward with the tariffs despite both economic superpowers in the midst of scheduled trade talks to ease tariff tensions.
The initial hope for the U.S. is that the new round tariffs signals its relentlessness on the application of pressure to force China’s hand in making a deal when actual negotiations finally materialize. The list of goods affected by the new round of tariffs was apparently modified by the White House, which removed about 300 goods from an initial list that included smart watches, certain chemicals, bicycle helmets, high chairs, and other goods.
In less than 24 hours, China responded with $60 billion worth of tariffs on U.S. goods beginning on Sept. 24. The new round of tariffs from China are said to affect a list of 5,207 products within a range of 5 to 10% as both the U.S. and China have already slapped each other with tariffs worth $50 billion total.
Just last week, the Federal Reserve hiked the federal funds rate by 25 basis points as a result of a strong U.S. economy, but market analysts are prognosticating that an escalation in the trade wars could give pause to the Fed’s current rate-hiking policies moving forward as they could potentially stymie economic growth. However, despite the growing concerns of trade wars, Fed Chairman Jerome Powell said its wide-ranging effects have yet to penetrate the economy and cause any disruptions.
“I think if you look at the aggregate performance of the U.S. economy, it’s hard to see much happening at this point,” said Powell. “You can look at it the other way and ask ‘If all the tariffs that have been announced are applied, what would be the affect at the aggregate level?’ They’re still relatively small.”
Powell did mention that loss of business confidence that could reduce investor capital and also the long-term effect on the financial markets are reasons that could bring trade wars under heavier scrutiny by the Federal Reserve. While Powell was quick to dismiss any short-term effects the tariffs have had thus far, he did mention that its long-term effects are cause for concern.
“More than anything, I would worry in the longer run where this is going,” said Powell. “If the end place we get to is lower tariffs, then that would be good–trade generally supports productivity and higher incomes.”
“If this inadvertently goes to a place where we have widespread tariffs for a long time in a more protectionist world, that’s going to be bad for the United States economy.”
Compounding the U.S. China trade wars is that no resolution appears to be in sight as White House economic advisor Larry Kudlow said discussions with China to ameliorate their trade differences aren’t moving forward. This prompted J.P. Morgan to reduced its year-end price target for the MSCI China index to from 95 to 85.
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