USA-China: Impacts of the Trade War on Markets

On Wednesday, April 23, the Market Update live featured Brendan Ahern, Chief Investment Officer at KraneShares, and Laura Pitta, Macro Research at Itaú BBA, moderated by Niraj Patel, Chief Equities Strategist at Banco Itaú International. The session discussed the developments of the intensifying trade war between the United States and China and its global impacts.

Here are the highlights of the discussion:

The new tariff measures by the United States, particularly affecting China and practically rendering bilateral trade unfeasible, have generated strong market volatility, bringing uncertainties to global trade. The magnitude of the tariffs, announced with more aggressive figures than expected, surprised the markets. In response, China adopted reciprocal measures, signaling that it would not passively yield to American pressure.

These measures can have a direct impact on American consumers, who may see an increase in the price of various products, including technology, and raised the risk of a global economic slowdown. Laura Pitta highlights that the current scenario is more severe than previous episodes of the trade war, as the absence of dialogue between the US and China hinders the construction of solutions. The markets expect some form of partial agreement to occur, but political unpredictability is a concerning factor.

According to Laura, since Donald Trump's first term, we have seen a shift in trade dynamics, with China being more prepared and less dependent on exports to the US. The services sector has also grown internally, reducing China's exposure to external pressures. This internal strengthening gives the Chinese a more comfortable position to resist new tariffs without major concessions.

The market bets on some de-escalation, but with risks: the lack of active communication between governments raises fears of more serious ruptures. On the other hand, Brendan points out that the influence of American business leaders on Trump's decisions may ease tariffs for sectors such as electronics and retail.

Another side effect of the war was the acceleration of China's technological independence, with investments in semiconductors, electric vehicles, and artificial intelligence. Brendan comments that the US attempt to contain Chinese technology may have the opposite effect, further strengthening local innovation.

Despite news surrounding a possible increase in tension in the Taiwan region, the shared view of our experts is that Chinese military action seems unlikely. The Chinese government's priority remains focused on economic and social stability, especially after observing the disastrous effects of sanctions on Russia.

In a context where volatility is expected to continue, Niraj Patel highlights that international diversification is essential. There is consensus that American markets will gradually adjust to the new scenario, while other markets — such as Europe and Japan — may gain greater relevance in portfolios. The outlook for American fixed income will depend on the intensity of the economic slowdown. Despite fiscal concerns in the US, the dollar still maintains its position as the main global reserve currency, and it is too early to assert a change in this regard.

The evolution of the scenario will depend on the pragmatism of global leaders, but experts agree that the environment of volatility and uncertainty is here to stay in the short and medium term.

• The trade war between the US and China has intensified, raising tariffs to levels that practically render bilateral trade unfeasible and increasing the risks of a global economic slowdown.
• China today is more prepared and less vulnerable than in 2018, allowing it to better withstand trade pressures and invest heavily in technological innovation.
• The absence of direct dialogue between the US and China generates additional uncertainties, and the market bets on some partial agreement but recognizes the high risk of rupture if negotiations fail.
• The environment of volatility reinforces the importance of international diversification in investments.
• Despite tensions, the dollar remains solid as a global reserve currency, and the immediate focus of the markets is to monitor signs of relief or worsening in trade negotiations.