The Countries Most at Risk of a Trade War

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By Gary Stringer, Kim Escue and Chad Keller, Stringer Asset Management

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With the announcement of proposed tariffs, the global markets reacted with a sharp sell-off and increased volatility despite little details on the impact to the U.S. or other economies. Similar to most news, the baby is often thrown out with the bath water when it comes to the markets. It is not a surprise that after a protectionist themed campaign, the Trump administration would propose tariffs and open the stage for renegotiations of many long-term trade deals. What has yet to be seen is how the targeted countries will respond and, ultimately, where the negotiations will lead. Generally, like any negotiation, the intention and actual end result often do not completely align. Without much clarity at this point, we think as they are currently proposed, the tariffs will have little economic impact. However, if we do end up in a full trade war, the playing field looks very different for each player and country.

How To Determine Who Is At Risk

As a general framework, the countries that heavily rely on international trade are the most at risk in a global trade war. Though the details of how such an event might playout are not clear at this time, investors should consider the broad risk of a trade war to a country by examining their trade as a percentage of their economy. In doing so, it is important to consider both imports and exports since focusing only on exports ignores the benefits that countries receive through imports. For example, domestic consumers often benefit from imports by lower prices and a broader selection of goods and services than could be created only through domestic sources. A reduction in imports would likely result in higher prices and fewer choices for domestic consumers.

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Trade as a percentage of the global economy has been steadily growing since 1960 but may have peaked a few years ago at more than 60% (exhibit 1). The latest figure of 56% for calendar year 2016 represents a slight pullback but is still reflective of a globally integrated economic system.

If this trade system were to be disrupted, through a global trade war or other phenomenon, certain countries would likely be more at risk than others. For example, total trade represents 27% of economic activity for the U.S., compared to 37% for China, which is often seen as a target of U.S. trade policy. Other countries are even more exposed, such as Singapore at 318%, Vietnam at 185%, Hungary at 169%, Canada at 64%, and the United Kingdom at 59% (exhibit 2).


Obviously, trade is not a zero-sum game, so trade can represent more than 100% of their economy for some countries. Gross Domestic Product (GDP), which is a favored measure of economic activity, is calculated using the following five components: Consumption [plus] Investment [plus] Government Spending [plus] Exports [minus] Imports, or C+I+G+X-M.

Consider a small country that has $1 billion of consumption, $1 billion of investment, and $1 billion of government spending. Next, we analyze their exports and imports. This country has a large factory that produces more goods than the country consumes, and exports $2 billion of goods. GDP is now $5 billion ($1B+$1B+$1B+$2B).

The country uses that money from exports to import goods and services worth $2 billion. Imports are subtracted from GDP, so total GDP is again $3 billion ($5B - $2B). Local consumers benefit from this trade by virtue of lower prices and a broader selection of goods and services. For this small country, total trade (exports of $2B plus imports of $2B) is $4 billion compared to GDP of $3 billion, so trade represents 133% of GDP and is clearly important to the economy.

What To Look For Next

In general terms, the larger the ratio of trade to the size of an economy, the more important trade is to the success of that economy. It makes sense then that the greater the proportion of trade is to an economy, the more vulnerable that economy is to a disruption in trade, such as a trade war. Of course, the size of the impact will be dependent on the nature of the trading relationships. For example, though trade represents 64% of the Canadian economy, much of that trade is with the U.S. and is unlikely to be affected by a trade war. Other countries are likely to be more vulnerable.

Based upon the facts as we know them today, we do not see a large scale trade war in the future. More importantly, we do not think these tariff talks and trade threats will cause a major disruption in the global economy. As we mentioned after the surprise Brexit vote and the following market selloff, the people who negotiate these deals understand their economic history and the importance of trade to economic wellbeing. Though markets may go through bouts of panic, we expect global trade to continue largely unabated and economic fundamentals to remain solid.

This article was written by Gary Stringer, CIO, Kim Escue, Senior Portfolio Manager, and Chad Keller, COO and CCO at Stringer Asset Management, a participant in the ETF Strategist Channel.


Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management, LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested.

Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.

Data is provided by various sources and prepared by Stringer Asset Management, LLC and has not been verified or audited by an independent accountant.

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