(Mar 23): President Trump on Thursday signed a memorandum directing his administration to take a range of actions against China centered on technology industries in response to the nation’s “economic aggression”. The tariffs were triggered by the Section 301 Investigation that the Office of the US Trade Representative initiated on August 2017. The investigation found that China’s policies resulted in at least USD 50bn in annual harm to the US economy. This is the likely amount of Chinese imports that will be targeted with tariffs, or about 10% of total US imports from China. The detailed list of targeted products will be announced within 15 days and is expected to focus on 10 strategic sectors including robotics and aerospace.

After pairing initial losses following the announcement, the S&P 500 closed down -2.5% and the Dow fell - 2.9% as sentiment soured throughout the afternoon. That being said, investors had expected tariff announcements between US$30 billion ($39 billion) and US$60 billion ($79 billion), with tariffs potentially even higher than the 25% that the Trump Administration announced will be proposed for public comment. Consequently, much of the late day weakness may have been momentum-based and not driven by incremental news flow.

We think it’s important not to overstate the direct impact of these tariffs on the global economy or equity markets at this stage. Today's announcement should have little effect on the US economy. The US$50 billion represents only about 2% of total US imports, while the tariffs will likely be on products that can be obtained outside of China to minimize the harm on the US. The global economy is also entering this period of increased trade tensions from a position of strong growth. 2018 is still expected to be the strongest year for the global economy since 2011. And central banks may yet temper their tightening bias given the threat to global growth from an escalating trade conflict. The Fed, ECB, and Bank of England have all warned of the risks to growth from a trade war in recent days and weeks. But we don’t downplay the potential risks. This latest action is likely to have a negative effect on Asian exports, which are currently growing at 12-13% a year.

We will be watchful in the coming days for more details on the specific actions by the Trump Administration and China’s reaction, which is key but as yet unknown. The outcome of these initial actions will only be determined after dozens of uncertainties have been resolved. We currently assign a 20-30% probability to a damaging retaliation.

China has already expressed a willingness to make concessions on market access without technology transfer, and the tariff announcement is not definitive, as the recent steel tariffs illustrate. Thus, we view this as the beginning of a long process towards an eventual resolution.

At this time investors should also ensure portfolios are well-diversified, and could consider equity put options to reduce portfolio volatility.

Our global tactical asset allocation remains pro-risk, to benefit from still-strong global economic growth, but we also hold counter-cyclical positions, including an overweight in 10-year US Treasuries, and an overweight in JPYNZD, that should perform if the market starts to price in a full scale trade war.

Impact on China

For now, we estimate that it will impact approximately -0.1% on GDP growth. There could be further measures from the US but current impact is not enough at this stage to revise our 6.6% 2018 forecast. China's exports US$2.2 trillion every year, US$500 billion of which is to US, so macro scale very small.

The above measures will have limited impact on the Chinese economy and A-share fundamentals as a whole. Overseas markets including the US contribute to around 15% of the total revenues of the A-share companies and 10% of the net profit. Some sectors have a higher exposure to overseas bmarkets such as electronics, home appliances, computers, machinery and auto.

Although the impact from a revenue perspective is minimal, investment sentiment is likely to be affected over the short term.

Impact on Asia-Pacific

We note that China has already announced more open market access in service industries for example as well as a sharpened focus on IP protection, and while the EU talked about possible measures on well known US export items, the import value of these amounts to roughly US$3.5 billion, not a very high number in the global trade context.

Regarding economic impact, countries such as Taiwan and Korea for example tend to have a higher export dependency than China. At UBS we have calculated that with an imposition of a 10% tariff on all Chinese exports to the US took place, it could potentially result in a drag of 0.3-0.4% to China’s GDP growth rate.

However, we continue to assume limited and targeted measures as our base case, not an all out trade war with retaliation as this is not in any country’s economic interest.

Impact on Singapore

As of the writing of this note, the STI is down more than 5%, with some cyclical stocks down more than7%. We see this as a knee jerk reaction and don’t think this is the start of a bear market but a short-term pull back, as volatility increases due to the events that transpired overnight. For investors with a longer term investment horizon, this is a good opportunity to accumulate value stocks on any weakness.