Prospects for a global trade war

While the global economy is continuing to experience strong economic growth, there are some recent developments that we are keeping an eye on.

The US Government has proposed introducing higher tariffs on a number of imports, some targeted at specific items (washing machines, solar panels, aluminium and steel) and some targeted at China in particular (US$50 billion of miscellaneous goods).

China has responded to both announcements with proposed tariffs of its own. Most recently, President Trump instructed the US Trade Representative to consider a further US$100 billion worth of tariffs on Chinese imports. At the moment, the trade tensions between China and the US are largely politically driven. There are elections in the US in November, and tariffs are popular with some voters.

Tariffs are a tax on imports. Increased tariffs in the US, and potentially China, would mean higher inflation and lower economic growth. While some specific companies will benefit, the wider economic damage more than offsets this. However, as the tariffs announced to date are small relative to the size of the US and Chinese economies, we don’t expect the aggregate economic impact to be large.

Importantly, statements by the US and Chinese governments subsequent to the tariff announcements have provided scope for negotiation. Both parties have noted they are prepared to negotiate a less damaging outcome than the announced tariffs. In addition, China has already made some concessions on trade policy and foreign investment to the US.

A key risk is that talk of negotiation halts and more tariffs are announced in the lead up to the November US elections.  If more significant tariffs are announced, global growth could be affected, which could harm investment returns. However, at this stage we do not believe this is the most likely outcome.

It is always important to note that super is a long-term investment and that geopolitical events, such as these proposed tariffs, happen from time to time. Read about market movements and long term thinking.

Over the 33 years that Cbus has been managing members’ super, investment markets have had a number of corrections, some bigger than others. Despite these corrections, the Growth (Cbus MySuper) option has delivered strong long-term returns – see chart below.

 

Since inception in 1984 to 30 June 2017.

Over the past 33 years, the Growth (Cbus MySuper) option has returned 9.24% on average each year with 30 of the 33 years being positive.

This example is for illustration purposes only. Balances have been calculated using financial year returns compounding annually. Returns are based on the crediting rate, which is the return minus investment fees, the Trustee Operating Cost and taxes. Excludes account keeping administration fees. Past performance is not a reliable indicator of future performance.