Digging into the Roots of US Trade Tensions

Talk of a “trade war” between the United States and several of its key trading partners continues to intensify. China has borne the brunt of the US tariffs targeting a wide range of goods, and has retaliated with threatened reprisals of its own, creating a tit-for-tat situation between the world’s two largest economies. Templeton Global Equity Group’s Norm Boersma digs into the roots of the current trade tensions. While the situation may amplify the upward pressure on inflation and interest rates that has been building late in the cycle—possibly to the advantage of value stocks that can benefit in such an environment—Boersma believes recent developments on balance are negative for global growth and cooperation.

The Backstory: Rise of Protectionism

While trade tensions have been making headlines for the past few months—and seem to be escalating recently—the causes have deep roots. Globalization has evolved and broadened over the past several decades, benefiting Western consumers, emerging-market manufacturers and the global economy in general. It has helped pull millions out of poverty and significantly strengthened the ranks of the global middle class. Yet, the benefits of globalization have not been distributed evenly. “Blue collar” Western workers who have seen their jobs sent overseas and struggled to adapt to the new economic landscape have felt understandably disaffected by globalization.

The financial crisis of a decade ago didn’t help, nor did the policy response, which succeeded in generating the asset-price inflation investors had sought, but failed to generate the wage inflation workers longed for.

For these and other reasons, protectionism has been generally on the rise in developed markets and has found expression in the United States under President Donald Trump’s “America first” platform. The problem, in our experience, is that protectionist policies rarely deliver in the long run on their promises.

Trump’s announced tariffs targeting a long list of goods including steel, aluminum, solar panels and home appliances are part of a protectionist trade stance that also includes America’s withdrawal from the Trans-Pacific Partnership and an ongoing investigation into China’s intellectual property practices. As of June 2018, the US Office of the United States Trade Representative has targeted more than 1,000 Chinese products valued at about $50 billion in 2018 trade values.1 The tariffs are set to be imposed in phases and mainly focus on those key industrial products and technologies tied to China’s “Made in China 2025” initiative.