Rising rates, trade war fears may diminish fund flows to EMs: Seth Freeman

Talking to ET Now, Seth Freeman, GlassRatner, says there could be a significant backlash if the tariffs come into effect and goods and products become much more expensive in the US.

Edited excerpts:

vernight we saw a big development. Trump has upped the ante in the potential trade war with China. He has slapped additional $100 billion worth of tariffs on the Chinese. Could this lead to another retaliatory measure from China? How do you expect the trade war to pan out going forward because one day Trump slaps these tariffs, the next day he wants to renegotiate the talks with the Chinese premium?

Well, part of President Trump’s response today was because earlier in the morning, China increased its targeted trade by $50 billion. So, it was a little bit of a tit for tat and reading Chinese publications about this, China is quite proud of the kind of response that the Chinese government has made and they are actually reacting in a sense, from a position of strength and trying to demonstrate that they are equal to the United States in economic power.

Given that exports are a very big part of the Chinese economic growth and because the US buys heavily from China, do you think Washington has more ways to actually dent the Chinese economy?

Yes, , but we are such a big importer from China and remember the so called tariffs are not going into force immediately. From both sides, they have 60 days. We see United States as saying that it is going to wait at least 60 days to impose these tariffs and China has responded by saying they will not impose the tariffs until the United States does. I guess that is the basis of claiming that these are somehow the opening gambits of a future negotiation but Americans import products from China because it is less expensive. I can imagine a significant backlash if these tariffs come into effect and goods and products that we buy in US become much more expensive.

A lot of people are looking at this as a strategy on part of Trump to renegotiate the deals with China and there is of course about 30 to 40 days for the final hearing. Do you believe that this is just a mere strategy and it may actually not be implemented?

Some of them are going to be very difficult to implement. There are two consequences of this. China is targeting oil and we have an abundance of shale oil and in the second half of last year, we were selling between $200 million and $800 million a month of oil to China. If China cuts back on its oil imports of US oil, that will really crimp that industry in United States.. Conversely, we are a big buyer of electronic products as consumers from China. Forget industrial products like steel, vehicles, pharmaceutical, aluminium, railway cars. We buy lot of TVs from China and I do not think that consumers are going to put up with higher prices on washing machines and TVs for political purposes.

How do you see emerging markets react to this because clearly they are under a fair bit of pressure because of the ongoing trade war and the constant retaliation from both the parities? Don’t you think there is actually an opportunity now that the trade war with China has started off? It could actually be an entry point and big opportunity for some of the emerging markets including India?

Under ordinary circumstances, I would say yes but other than the fact that these tariffs are really 60 days away from being potentially imposed, this is the kind of uncertainty that drives investors crazy. For those investors and fund managers that are not dedicated to emerging markets, they may have to stay away a little longer. I think another aspect of this is the fact that US interest rates are rising and partly because of expectations and probably because of the trade war and that also tends to diminish the level of money flows to emerging markets.