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Summary of the Document: US Tariffs and Emerging Markets

Core Content

The document discusses the potential impact of the US administration's new tariffs on steel and aluminium, as well as the broader implications for global trade and emerging markets (EM). It is authored by Wike Groenenberg, Head of Emerging Markets Research at BNP Paribas London Branch, and published on 9 March 2018.

Main Points

• US Tariff Announcement: On 1 March 2018, the US administration announced a 25% tariff on steel and a 10% tariff on aluminium, following earlier measures on washing machines and solar panels.
• Impact on EM Countries: The direct impact of these tariffs on EM countries is expected to be limited due to the small share of steel and aluminium exports from EM to the US. However, indirect effects, such as a decline in global steel prices, could affect EM producers.
• Bahrain as an Exception: Bahrain is an exception, as its steel and aluminium exports to the US represent 1.8% of its GDP, making it more vulnerable to the tariffs.
• National Security vs. Targeting China: The official justification for the tariffs is national security, but the measures are likely aimed at China, which has the largest trade deficit with the US. The US may consider exemptions for NAFTA partners and Australia.
• Potential Retaliation: Other countries, particularly Europe, may retaliate with their own tariffs, though a large-scale escalation remains a tail risk.
• Trade Growth and EM Benefits: Emerging markets have greatly benefited from global trade growth, which has outpaced developed market (DM) GDP growth. This growth has been driven by higher income levels and reduced trade costs.
• Tariff Reductions: Tariffs have significantly decreased globally, with EM countries seeing greater reductions than DM. However, they still remain higher, especially for agricultural products.
• Trade Agreements: The number of trade agreements has increased over the decades, contributing to global trade expansion. EM countries have seen substantial gains from these agreements.
• Future Outlook: A significant escalation of trade conflicts could negatively affect EM through exports, employment, and capital flows. However, for now, the impact is considered manageable.

Key Information

• Trade Exposure: Chart 5 highlights that Mexico, Canada, and Vietnam have the largest exports exposure to the US, with these exports representing a significant portion of their GDP.
• Global Trade Growth: Chart 6 shows that global trade volume growth has consistently outpaced DM GDP growth, with a recent uptick in 2017.
• Tariff Trends: Chart 8 illustrates the significant reduction in tariffs in EM countries, from nearly 40% to just below 10%, while DM tariffs have dropped to 3%.
• EM Strategy: The article supports being overweight EM assets (rates, FX, and equities) in 2017 and continues to do so in 2018, based on the positive trade environment.

Risks and Uncertainties

• Protectionist Escalation: The risk of further protectionist measures by the US or other countries remains, especially in the context of the upcoming midterm elections.
• Retaliatory Measures: Countries like China and Europe may respond with their own tariffs, potentially leading to a trade war.
• Capital Flow Sensitivity: EM countries that are more dependent on capital flows from the US are at greater risk in the event of a trade conflict.

Conclusion

Despite the US's recent tariff announcements, the direct impact on EM countries is expected to be limited. However, the broader risk of trade conflict escalation and the potential for retaliatory measures could have significant negative consequences for EM. The article emphasizes that EM has been a major beneficiary of global trade and that the current trade environment is still supportive, though with some uncertainties.

Emerging Markets Strategy Contacts

Legal and Disclosure Notes

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• It may contain "Research" as defined under MiFID II unbundling rules.
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• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed.
• The information is not a prospectus and does not constitute an offer to sell securities.
• The document may contain back-tested performance data, which is for illustrative purposes only.
• Options and ETFs discussed are complex and may involve significant risk.
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