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10 October 2019

Tariff wars escalate

As the Brexit deadline looms, the US is to hit the EU with a raft of tariffs to be levied by 18th October. President Trump is proposing 25% tariffs on imports including cheese, yoghurt and butter from the EU, wool, bed linen and cotton blankets from the UK and scissors, knives and coffee from Germany. These levies come at a time when global economies are already beginning to feel the strain, with World Bank President David Malpass saying growth will be “even lower than the forecast from four months ago due to Brexit, Europe’s recession and trade uncertainty”.

The recent tariff war stems from a 15-year dispute between Boeing and Airbus and the receiving of illegal state subsidies. The World Trade Organisation has granted the US permission to impose a range of tariffs after the EU failed to withdraw funding to Airbus supporting the development of A380 and A350 jets. It is expected the US will impose US$7.5bn on EU goods, compounding already fragile trade relations.

EU trade commissioner Cecilia Malmstrom stated that it would be “shortsighted and counterproductive” for the US to impose the tariffs, highlighting the likelihood that the EU would soon be allowed to do the same in the Boeing case. She went on to say that “the mutual imposition of countermeasures, however, would only inflict damage on businesses and citizens on both sides of the Atlantic, and harm global trade and the broader aviation industry at a sensitive time”.

Brexit fears continue to spook UK consumers, as retail sales fell 1.3% year-on-year in September. Retail sales are a key indicator of the economy as they account for nearly one third of consumer spending. High street stores were impacted the most as consumers’ main spending was on food, drink and monthly subscriptions. Richard Lim, Retail Economics Chief Executive, said: “Almost two thirds of remainers said that they are likely to be more cautious with their discretionary spending in the final three months of the year, compared with a quarter of leavers.”

Finally, Prime Minister Boris Johnson is fighting to salvage what is left of a potential Brexit deal. Following a telephone conversation with German Chancellor Angela Merkel, Mr Johnson proposed a new backstop proposal. The proposal included ditching the current Irish backstop for a new arrangement which would see Northern Ireland stay in the European single market for goods but leave the customs union. This move would eliminate the need for a physical border between Northern Ireland and the Republic of Ireland, with custom checks being decentralised. Ms Merkel responded bluntly, saying Northern Ireland would have to stay in the EU customs union under any Brexit deal. With no sign of a way to break the impasse, equity markets have begun to show signs of concern. Government bond yields have started to fall again after rallying slightly through the summer recess. The fear is that Brexit is another component pushing the world  toward recession in 2020, along with the China-US trade war and civil unrest in Hong Kong. Against this backdrop, we continue to adopt a cautious approach to portfolio asset allocation.

Victoria Hill | Assistant Investment Manager
Tariff wars escalate
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