Tariffs: The battle between the US and China increases the risk that Europe will increase its exports of...

The global trade landscape remains defined by persistent tariff regimes, with the US-China trade war in a lull but maintaining significant duties (US on China 58%, China on US 33%). China is strategically responding by restricting rare earth exports and reorienting its export focus, leading to a notable shift of industrial overcapacity towards the European Union, where Chinese exports increased by 11% while decreasing by approximately one-third to the US. This dynamic, alongside existing trade imbalances and geopolitical tensions, prompts the EU to adopt more assertive trade defense measures, though relations with China are projected to remain strained, with US tariffs expected to dampen China's export and overall economic growth.

Analysis

The global trade environment remains characterized by significant, albeit temporarily static, tariff barriers, particularly between the United States and China. The US-China trade war is in a 'lull' with average tariffs at 58% on Chinese goods in the US and 33% on US goods in China, and a key catalyst for change will be the expiration of the tariff truce in November. In response to these pressures, China is strategically reorienting its trade flows, resulting in a material impact on global commerce patterns. Year-to-date data through August shows Chinese exports to the US have declined by approximately one-third, while simultaneously increasing by 11% to the European Union, 16% to ASEAN nations, and 7% to Latin America. This shift confirms European concerns about absorbing Chinese industrial overcapacity, prompting a more assertive defensive stance from Brussels, including the use of countervailing duties on products like electric vehicles. Despite China's efforts to bolster its image as a reliable partner and its stated goal of stimulating domestic demand, its policy priority remains on manufacturing and technological innovation, with the sustained US tariffs expected to dampen its overall economic growth trajectory. Relations between the EU and China are projected to remain tense, as Europe's new trade defense measures are not expected to alter Beijing's industrial policy, and geopolitical disagreements persist.

Key Decisions for Investors

• Investors should monitor European industrial sectors, particularly electric vehicles and medical devices, for increased volatility and pricing pressure as they face a surge in Chinese imports and a more aggressive EU regulatory response.
• Consider re-evaluating exposure to emerging markets, specifically in ASEAN and Latin America, which are demonstrating strong import growth as they benefit from China's strategic trade redirection away from the United States.
• Maintain a cautious outlook on assets highly sensitive to US-China trade flows ahead of the November tariff truce deadline, while also assessing supply chain vulnerabilities related to China's demonstrated control over critical raw materials like rare earths.