The angst about rising trade tensions that’s hit equity markets may presage a prolonged conflict, considering that when it comes to China, the Trump administration may have greater ambitions than just a more advantageous commercial arrangement.
While Chinese officials have pressed for a list of specific demands as President Donald Trump prepares to execute measures including tariffs, there may be no such theoretical list, if this prism of analysis is correct. Morgan Stanley says the risks are now skewing toward a “protectionist push” scenario that roils stocks.
The U.S. Trade Representative’s office, along with national security officials labeling China a “strategic competitor” ultimately aren’t interested in things such as greater market access for American companies, says Arthur Kroeber, head of research at economic consultancy Gavekal Dragonomics in Beijing. Instead, these Trump administration elements are engaging in an effort to contain the growing sway of a state-driven Chinese economic model on the global stage, he argues.
“The USTR is not trying to bargain with Beijing: it is trying to force a deep change in behavior,” Kroeber wrote in a March 2 note. The policy “is to either get China to dismantle its industrial-policy edifice and conduct its economy more along Western lines, or failing that, ensure the U.S. defeats China in the race for technological supremacy.”
Kroeber added that “the odds are that the trade and security hawks will have the better of the battle in 2018” in the administration, unless supporters of globalization such as White House economic adviser Gary Cohn can organize greater support from U.S. companies with major China operations that could be under threat.
Morgan Stanley analysts are more sanguine for now, anticipating a measured international response to the U.S.’s latest move to put tariffs on aluminum and steel imports. A move to sanction China on intellectual property protection could tip the balance toward tensions, however.
For U.S. stocks, “a material escalation toward protectionism would involve additional risks, increase volatility further, and likely dampen broader risk appetite,” Morgan Stanley strategists Michael Zezas and Meredith Pickett wrote in a note Monday. That scenario would also mean “downside” for Treasury yields this year, they wrote.