Trade War History Suggests Relief Ahead for Emerging Markets
If the past century is any guide, an escalation in tit-for-tat tariffs between the U.S. and China may boost emerging markets.
Trade wars instigated by the U.S. in the past 100 years usually coincided with weakness in the dollar, which often lifted the value of currencies in developing nations. That could prove true again as there’s little sign of a resolution between Washington and Beijing, even after an apparent tradebetween Donald Trump and European Commission President Jean-Claude Juncker.
The dollar is likely to weaken as tariffs take hold because any benefits to manufacturers are nullified by the higher prices and drop in consumer demand that levies bring, according to Kunal Ghosh, a San Diego-based portfolio manager at Allianz Global Investors, which oversees about $580 billion. He said that over the long term, the trade jabs could also decrease the dollar’s use as a global reserve currency and its value would suffer.
Ghosh said additional tariffs will probably spur an initial, panic-driven selloff in emerging markets, but that should reverse as investors digest the news.
“EM assets by nature have been negatively correlated to the dollar, so a weakness of the greenback will” help drive gains, he said.
Of course, there’s plenty of skepticism about trade wars benefiting emerging markets. Firms from Franklin Templeton Investments to BlackRock Inc. are forecasting a rebound in risk assets, but say a global push toward protectionism is a risk to their outlook for developing nations. And some dollar strategists say that the greenback’s path is more likely to be dictated by broader macroeconomic forces and monetary policy than any trade disputes.
"You want to look carefully at what else was going on at the time of the previous trade wars," said Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock Investment Institute, the asset manager’s think tank. "In many cases the trade wars coincided with -- and probably were motivated in part by -- a recession in the U.S., which itself would explain a weaker dollar."
But for all the skepticism, Ghosh points to what’s happened during past periods of trade tensions:
1930 Smoot-Hawley Tariff Act
Legislation passed under Herbert Hoover’s administration to increase tariffs on agricultural goods came back to bite the U.S. The nation’s largest trading partner, Canada, and a handful of European countries retaliated, while the dollar’s value against its major peers slid to a multi-decade low. Those trade rows were followed in 1933 by one of the most significant changes in foreign finance when President Franklin Delano Roosevelt withdrew the U.S. from the gold standard, devaluing the dollar even further in gold terms. Emerging economies that were quick to abandon gold recovered more quickly.
1985 Plaza Accord
As the U.S. deficit with Japan ballooned in the 1980s, Congress began debating protectionist legislation. That led President Ronald Reagan to convene a meeting with the country’s top trade partners inside the Plaza Hotel in Manhattan. They formed a pact to depreciate the dollar in relation to the yen and Germany’s mark, and succeeded.
2002 Steel Tariffs
When George W. Bush’s administration implemented steel tariffs in 2002, a similar reaction ensued: The dollar fell to a six-year low as the European Union threatened tariffs of its own. The measures were lifted in December 2003, but not before a number of emerging-market currencies posted monster rallies. South Africa’s rand climbed 73 percent in that span to lead gains, followed by the Bulgarian lev (38 percent) and Czech koruna (35 percent). The peso in Argentina, which was exempt from the tariffs, fell 32 percent as the country weathered the beginning of an unrelated domestic debt crisis.