Investment update 3 April 2018

Last week in the markets

Over the past week, Australian shares were down 1.0% with small company shares also down 1.0%. Shares in developed countries were up 1.5%, with the US market up 2.0%. Shares in emerging markets were down 0.1%. The Australian dollar lost 0.3% to 76.79 US cents. The Australian 10 year bond yield declined to 2.60% while the US 10 year bond yield declined to 2.74%. The oil price fell by 1.4% to 64.94 US dollars per barrel.

Trade wars - and a new hope

Global trade is under threat. US President Donald Trump seems intent on igniting trade wars which will act as a headwind for the global economy and may stifle growth. But is there a new hope?

President Trump has announced his plans for tariffs on steel (25%) and aluminium (10%), which are expected to take effect in early June after a public consultation period. In the special case of China, the tariffs will be widened to other technology products. China’s threats of retaliation and similar statements by the European Union have not altered the President’s plans. The President believes trade wars are “good and easy to win”. China has recently followed through on its threat and placed tariffs of up to 25% on a wide range of US products, from frozen pork and scrap aluminium to wine and cherries. Chinese President Xi Jinping will implement the tariffs immediately. The timing can only inflame the situation.

In a brief article in The Conversation, Associate Professor Greg Wright from the University of California provides a clear argument for why Trump’s tariffs will hurt many countries, including the US. The essence of the argument rests in the interconnectedness and complexity of modern global trade. For example, many products are assembled in China from foreign inputs.

This interconnectedness and complexity may bring about another unintended consequence - uncertainty. If, as Professor Wright suggests, “a tariff on flat screen TVs can lead to fewer visitors to the Grand Canyon”, then decision makers in firms around the world will be reluctant to invest in multi-year projects. This is because people are typically averse to uncertainty. In other words, we prefer known risks to unknown risks, and we don’t like ambiguity.

Throughout history mankind has shown a tremendous capacity for innovation; international trade is no exception. The standardisation of shipping containers had a tremendous impact on the speed at which ships could be loaded and unloaded at ports around the world. Just-in-time manufacturing, product tracking through bar codes, and the timely communication of information from the point-of-sale back through the supply chain have also contributed positively to global trade. The internet unleashed another source of demand by minimising the steps from the supplier to the consumer and reducing prices. So, is there anything further in the pipeline to offset potential trade wars? A new hope?

Blockchain technology has the potential to revolutionise trade over the long term. The key features of blockchain technology are the distributed ledger and encryption. These features are perfect for driving efficiency in secure and reliable trade, and its financing. Any aspect of documentation - the purchase order, origin of the goods, tariff payments, quality certificates - can be included and tracked on the blockchain. Payments can be automatically released as goods arrive at their destination. This should lead to greater efficiency, lower costs, unlock the possibility of new trade that was not previously possible owing to insufficient confidence, and could act as an offset to trade tariffs.

Blockchain technology for trade is already operating in prototype form. It will take time and agreement from many parties around the world to extract the full potential from this technology – but there are good grounds for hope.

Signing off

Sean Anthonisz | Senior Quantitative Analyst