As people gather to watch the “beautiful game” of World Cup football this week, an ugly clash of nations has also become a spectator sport: escalating trade wars.
While the United States failed to qualify a team for the World Cup this year, the superpower is vying for world domination against what it sees as discriminatory trade practices by China, the European Union and NAFTA allies here at home.
Launching its latest penalty kick, the Trump administration phased in 25% tariffs on $50 billion of Chinese imports earlier today, targeting things like industrial machinery and components. Beijing vows to retaliate with its own set of tariffs on American SUVs, soybeans, airplanes and more.
Last month, the U.S. imposed a 25% tariff on all steel imports, and 10% on aluminum, ahead of a rather hostile appearance by U.S. President Donald Trump among allies at the G7 summit in Canada.
In this pursuit, it seems, the U.S. wants to control the field and put every nation at odds to fight back.
Who scores when trading powers clash?
Another round of trade wars might lower confidence in the U.S. economy and markets, but the rest of the world is more likely to suffer ill effects.
The U.S. dollar typically strengthens when global trade slows, so we see little risk of it losing its status as the world’s premier reserve currency.
For China, an escalating trade war with the U.S. would provide President Xi with someone to blame for the pain of economic reforms that need to be implemented in his country, one way or another.
For the rest of Asia, direct economic impact of proposed U.S. tariffs on Chinese imports would be fairly small, but disruption to regional supply chains could be widespread.
Taiwan, Singapore and Korea are most exposed to broad-based economic weakness in Asia. A large share of their economic output is tied to exports of intermediate goods to China, most of which are assembled, processed and re-exported elsewhere.
Consequences of U.S.–China trade tensions could trickle into the consumer discretionary, industrials and technology sectors, as tariffs add costs to materials in the supply chain for manufactured goods.
Mexico: Out of the game, but still kicking around NAFTA
The same day Mexico was eliminated from World Cup play, the country’s electorate handed a landslide victory to a new leftist president, Andrés Manuel López Obrador, popularly known as AMLO. It was hard to tell which story was bigger news.
López Obrador’s agenda is more nationalist than socialist, aimed at combatting corruption and drug trade. Critical of NAFTA in the past, he now seems to support the continued renegotiation of NAFTA and wants his team to be involved in any talks before he is sworn in on December 1st.
Yet even as Canada and Mexico try to push ahead with discussions, Trump would prefer to sit out until after November’s U.S. congressional mid-term elections before committing to a new agreement—along with his threats of additional tariffs.
Ironically, in sport, we remain amigos: Canada, the U.S. and Mexico worked together to win a joint bid to host the 2026 FIFA World Cup.
No set pieces in play: investment signals we watch for
We look closely at the business cycle, global macroeconomic conditions, corporate earnings, financial market conditions and risk when deciding whether to overweight equities relative to bonds in our portfolios.
As such, we do not see cause for any immediate adjustments to our investment strategy. Our indicators are signaling that equities are likely to outperform bonds over the next twelve months, and we remain moderately overweight in equities.
Our portfolios remain positioned with a tactical overweight allocation to equities in general, and to U.S. equities and the U.S. dollar in particular. We also maintain a moderately overweight position in French and German equity, and are neutral on emerging markets.
We will continue to focus on business sentiment and corporate earnings to assess whether trade policy uncertainty is having any impact on corporate spending and expansion plans.
Rooting for the home team in a globally connected economy
Unlike soccer, which will crown a World Cup champion next week, there is no gold trophy or winner-takes-all outcome at the end of these trade wars.
Every four years, the most popular sport on the planet rekindles rivalries and national ties. On the investment team at MD, where I have colleagues from places like Tunisia, Morocco, Cameroon, Congo, Haiti, China, Germany, Switzerland, Italy, England, Ireland and Scotland, we can proudly wear many colours in a friendly camaraderie.
For the record, I’ll be cheering for Croatia this weekend. It may be a long shot, but World Cup is one spectacle that can sometimes reward the underdog.