トランプ関税は交渉の始まりか、貿易戦争の勃発か

This is an edited audio transcript of the Talking Heads episode with Zhikai Chen

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads Podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing the recent tariff announcements from the Trump administration and the implications for emerging markets. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Zhikai Chen, Head of Global Emerging Markets. Welcome, Zhikai, and thanks for joining me.

Zhikai Chen: Thanks for having me, Daniel.

DM: The topic of today, and the topic that’s going be on investors’ minds for a while yet, is assessing the ramifications of the most recent announcements. What does it mean for profits, particularly for emerging market countries? What’s your initial assessment of the impact? And what that will mean for Asian economies or for emerging market economies [and] emerging market equities?

ZC: For Asia, which are predominantly export oriented economies, [it is] worse than expectations, so that’s not good. Is this the upper end and will there be initial bargaining levels? Each of the economies would negotiate with the US administration to see if there’s a way to reduce the ultimate tariff. This will need to kick off very quickly. We know Vietnam’s Prime Minister will be in Washington to meet with this administration this weekend to see if there’s a possibility of reaching an agreement. No surprises Vietnam having been chosen as one of the economies where multinationals have been establishing production bases post the China/US trade war during the first Trump administration. So, I think this is still the first round, and we are trying to figure out whether this is the worst-case scenario or a likely scenario for the next six to 12 months.

DM: All the headlines we see now are taking a negative interpretation of what’s occurred. That said, if you read the justifications for the measures, two things were mentioned. One: on average, US tariffs prior to all these announcements were lower than for most US trading partners. So, this is to some degree creating a level playing field. Then there were specific examples where tariff levels are exceedingly high vis-a-vis the US. One of the most notable ones was a 700% tariff on US rice imports into Japan. The point that countries might have to say, okay, we reduce this tariff and the Trump administration responds in kind. That’s probably the fig leaf that we’re holding onto.

ZC: That’s definitely a possibility. But this is also a longstanding function of the fact that the US consumer has always been the consumer of last resort of the world. We see a very large trade deficit that the US is running versus the rest of the world because of the US consumer. Certainly if room can be made to negotiate through some of the areas, then the ultimate tariff might be lower than what is publicised, but I also suspect that the US is probably looking at a minimum of 10% tariffs globally.

DM: Ideally, investors would like to see an outcome that’s more moderate over time. One aspect that hasn’t been brought up too much, this is going to raise a significant amount of revenue for the US government. Given the size of the budget deficit levels in the US, this is a good thing if you believe that the US needs to pursue fiscal consolidation to deal with the debt situation. That means that we should see lower interest rates, which should offset some of the negative impact from the price increases, though I imagine that’s cold comfort for equity investors.

So, the inevitable question becomes, how do other countries, how do companies react? The concern is that this leads to retaliation and then retaliation to the retaliation. Governments up to now acknowledge the need to avoid exactly that scenario. If we think about stimulus measures, say, from the Chinese government looking for other export markets, what can governments or companies do to try to offset the impact of the tariffs?

ZC: It does depend on which economies you’re talking about. For most emerging economies, policymakers are used to dealing with shocks and they’ll adapt to the new reality. They will try their best to see if there’s a way to resolve some of those tariffs and hopefully reach an agreement where the tariff is as low as possible, perhaps with a 10% base level. But there is a possibility that for some of the smaller EM economies where the consumption power is really not there, there’s very little they can do. This would create a situation where they struggle to offset some of the fixed asset investment which they have benefited from and to try to diversify their export base.

The largest EM economy, China, would have ample fiscal ammunition to shield the economy from the potential impact of the tariffs. They have the fiscal will to put in a significant expansion of their budget deficit to support the economy and support consumption.

DM: That makes a good point: the distinction between small open economies and large economies. If you’re Europe or China, you can rely on domestic demand to make up for what you’re going to lose on the export market. But if you’re a small open economy, there’s not really that channel. We turn then to globalisation. It seems to be the US retreating from the principle of global free trade. Does this raise the prospect of two worlds where you have the US more or less trading with itself, and EM and China trading with themselves? Does that change how you think about the companies you want to be investing in?

ZC: The world that we have operated and invested in has been used to relying on the US consumer for many decades. It’s going to be challenging for us to quickly find another source of a potential demand for all the goods and services the world produces that could replace that particular demand. That’s the fear that we have for a lot of emerging economies. If the tariffs are going ahead, it will mean a sharp reduction in terms of net exports. Depending on the economy involved, it could be a sharp contraction of their overall GDP as well.

In terms of trading blocks, there’s certainly interest from other trading partners. In recent weeks, we have seen traditional competitors and geopolitical rivals – South Korea, Japan, and China – talking about enhancing the overall trading cooperation as well as opening their markets to each other. How this will evolve over the next couple of months or quarters will be something that we watch quite carefully. If you look at some of the smaller Asian economies. their intraregional trade and their trade with China in particular is now bigger than their trade with the US overall. That will probably be used as some offset, but I will still say that there’s probably going to be a challenging and negative environment for most of the export oriented economies in the immediate term. We just have to take a pause here and wait and see right now.

DM: From a corporate profitability point of view, an emerging market company that was producing in its home country for export to the US, with the tariffs, it sets up a factory in the US, produces in the US and sells there. So, from a revenue point of view and profits, the impact doesn’t necessarily have to be significant, but from the country’s point of view, employment is taking place in the US instead of at home, that’s where the bigger impact is going to be felt.

ZC: That’s a great point. One driving factors of the emerging market developing model has been that they export their way into high income growth and hopefully make a transition from an emerging market into developed markets where the domestic consumption can start to take over. So, potentially, this route is now closed to them. Policymakers will need to revisit their domestic policy and reorientate domestic investment. It’s going be quite challenging, but I don’t think they have a choice. 

DM: Well, thank you very much. This is very much a quick reaction to all the news. That’s it for this week’s episode of Talking Heads. If you would like more information, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights@viewpoint.bnpparibas-am.com. Just before we go, I’d like to mention that the Talking Heads podcast is available on Spotify and on YouTube. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Zhikai Chen, Global Head of Emerging Market Equities. Thank you. And until next week, take care.