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10-07-2019

Product code Dissertation-PH431

2018 was the year of uncertainty and it started with a fall in markets all over the world. The threat of an upcoming trade war was the prime reason of concern for many investors on the Wall Street. Among the looming tensions of a forthcoming trade war all the markets saw an increase in risk and a decrease in returns in January. The markets recovered eventually but the overall impact of the risk remained throughout the year as there was again a year-end decrease in returns. But, one could question was the decrease in returns actually due to the trade war.

Some of the market shocks that 2018 saw coincided with the dates of major announcements related to the US-china trade war. At the same time many of them did not. The announcements did lead to market shocks momentarily, but it is difficult to say if any of those had a lasting impact on the stock markets or if those shocks were contained within a short period of time.

We also need to see if these announcements had an impact on the markets only in United States of America and China or if the impacts were felt by the stock markets of other nations as well. The study here aims to see the impact of a trade war on the stock markets in a long run. There definitely is a strong visible impact on the stock markets in a short run but that might not be the cause of decreased returns. The overall decreased returns of 2018 could very well be due to other factors like the sanctions imposed on Kremlin. Hence, we will be studying the impact of such market announcements in long run to gather empirical data on if the trade war really had an impact. At the same time, we also need to analyse the direction of impact from the trade war. This becomes especially useful when we analyse the stock market returns of nations other than USA and China as a positive impact will show that the nations were able to capitalise on the trade war.

The stock markets are the place where the companies go to raise money. It is an easy way for firms with good market reputation to raise money and at the same time the cost of equity capital also decreases for the firms with high brand values. As the interest of shareholders in the company grows its stock prices rise yielding high capital gains to the shareholders. At the same time a decrease in their interest of a disaster in the company leads to the decrease in the share value and hence negative returns. However, just the company is not responsible for the change in its stock price. There are various external factors as well. The competition in the industry that it works in and the health of the upstream and the downstream industries also affect the health of the returns of a firm.

These effects are somewhat countered when we talk at the stock market level where the increase in the stock prices of one firm from one industry are countered by the decrease in the stock prices of another firm in another industry. However, other forces start to affect the stock market as a whole. The government policies, the international economic climate and the change in the  credibility of the country itself affect the stock market as a whole. These are large economic factors which affect all the industries at the same time. Some have a positive impact, and some have a negative and the overall interactions between these changes decides the net impact on the stock markets. One such factor is the trade war. When one nation imposes restrictions on the import of goods from another nation then that is termed as a trade war. A trade war is capable of affecting multiple industries and not just the industry whose products saw an increased restriction.

Trade wars have always been linked to a decrease in stock market returns. As the concerns of trade wars grow the risk in the stock market is also said to grow due to the uncertainty about the eventual effects of a trade war if it actually happens. Like any other event speculations of a trade war can raise the stock market or completely kill the returns. And all that happens before the trade war actually takes place. The actual trade war is a completely different scenario.

If there is a trade war, then the domestic industries which consume the affected imported products will find it difficult to gather enough resources and fulfil the market demands. The stock prices will eventually decrease in that case. At the same time the domestic producers of the same imported products will find the market demands increasing for their products and thus, they will see an increase in stock prices. The overall impact of such a trade war becomes a trade-off between the losing and the gaining industries. The overall impact can also be neutral. However, the empirical studies to support any of these conclusions are not very vast and comprehensive.

But till ow we have only talked about the two-party nations which are involved in a trad war. In this era of globalisation two nations do not work in silos. There is no such thing as a binary effect. Rather there is always a ripple effect. When one nation goes on a trade war with other nation then there should also be a spill over effect of that on other nations as well. Sanctions might be a good example to explain the same. USA imposed sanctions on the nation of Iran. So, what will be the effect of that on other nations.

First the nations which are friendly with USA will also cease business relations with Iran to maintain healthy relations with USA. A similar effect will be seen from the nations which depend on USA in economic terms or have large business relations with them. On the other hand, the nations which are unfriendly to USA will try to increase their business with Iran to leverage the situation to their advantage.

But even that approach is restrictive. The effect will not only be on the trade between the nations with Iran as one of the trading party. Iran is a big producer of oil. Which means that sanctions on Iran will lead to a shortage of oil in the international market. Other oil producing nations will be affected as well. They will try to leverage the situation to their advantage. We will also see Brent rising due to the shortage of oil in the international markets. And thus, the industries which depend on Oil will see negative returns.

Thus, we can see that all the actions have a butterfly effect. Any action by one nation on other can possibly affect the stock markets of multiple nations. The extent of that effect and the directions are a matter of further discussion and evaluation of the situation more closely. Similarly, trade wars do not only have a potential to affect the two countries involved in  trade war. Butthey are capable of affecting multiple nations on a global level. It depends on the policies of the nations and the acumen of the economists in those nations how they are able to shield their country from the affects of a trad war in the long run and how thy are able to salvage a situation. But the actual industries do see an impact from a trade war. If that impact translates into the stock market of those nations and if that impact is positive or negative will depend totally on the nation.

Literature Review

Trade war can be attributed to the phenomenon known as protectionism. The effects of protectionism range from tariffs to subsidised production for exporting companies [5]. Protectionism will always have an effect on the competitiveness of the domestic market against the international sellers. In this case the trade war is the means to allow the domestic US industries, like manufacturing, to play catch-up with the Chinese producers. This will finally have an impact on the market share of the domestic producers in USA where their domestic share will increase, and the market share of the international competitors will decrease.

A trade war has various overall monetary and economic impacts. As a matter of fact ,initial protectionist measures and striking back raise the expenses of exchange for the members engaged with the exchange struggle, for our situation the US and China. This will prompt lower fare and import volumes on either side. The negative effect on exchange volumes is mostly relieved by fare substitution impacts, as the negative effect is somewhat balanced by diverting exchange to different goals. To give a precedent, in the present exchange war, China has forced import duties on US Soybeans finishing off the US which customarily sent out the greater part of their soybean exports to China, the world's biggest shipper. Thus, now the US should send the majority of their soybean fare to different shores. This dissimilarity in exchange limit the monetary misfortunes mostly, however as our partners from Food and Agri Research [6] have contended, if the US doesn't send its soybeans to China, it needs to purchase practically 100% piece of the pie in every single other nation on the planet by limiting costs well beneath those in contender South America. Another moderating impact may be the reaction of the swapping scale. China's Exchange Rate (CNY) has devalued by 9% since April, which has halfway moderated the higher soybean costs China needs to pay for South American Soybeans.

Rather than the relieving the impacts of substitution on their exports, the negative effect of the trade war on exchange could be exasperated by the incorporated value chain models. Over the previous decades, global firms have progressively been misusing similar universal preferences by moving parts of their creation forms abroad into their own land. For instance, they profit by low work costs in Asia for the incorporation of merchandise into a single unit, while showcasing and R&D are situated at the command post in their own nations. This has empowered them to create all the products more proficiently and enhance their intensity keeping their costs low. The drawback of these purported cut up esteem chains is that multinationals have turned out to be increasingly helpless against import taxes on middle items or wares from abroad. For example, the US levy bundle on Chinese imports of USD 50bn executed this late spring applies fundamentally to middle of the road items and capital products [7]. Subsequently, just about 40% of the levies in this USD 50bn bundle are borne for by Chinese firms while the staying 60% of the taxes are consumed by outside firms that are dynamic in China [8]. The levies on PCs and electronic items are even borne for 87% by remote firms. At last, the US firms that depend on intermediates imported from China will turn out to be progressively costly because of exchange obstructions (and the other way around), which implies that these organizations will confront either a crumbling of intensity because of higher retail costs (and higher fare costs and a lower worldwide piece of the overall industry) or a retention of the greater expenses, which will hurt their productivity.

Customers in the two nations will feel the squeeze also, as the exchange/trade obstructions will result in import swelling, causing harm to both the sides, which will consume genuine discretionary cashflow of families and lead to bring down family unit spending for the general public which will be one of the worst impacted parties by the trade war. Trade wars will by and large be the main reason behind the monetary market disturbance, which influences both buyer and maker estimation and could at last lead to bring down private venture and private utilization. We have seen the problematic idea of vulnerability brought about in terms of professional career wars on money related markets this year. Particularly developing markets (EM's) have borne the brunt of the US-Chinese strains over exchange, as financial specialist feeling transformed from a hazard on to chance off modus, which brought about huge capital outpourings and put EM monetary forms under strain [9]. The Chinese CNY lost 7% against the US dollar this fall opposite the start of the year. In spite of the fact that this devaluation absolutely has relieved the effect for Chinese exporters, the misfortunes as far as exchange (for example increasingly costly imports) will be felt by Chinese families and have put extra descending weight on private utilization. For the US, the inverse is the situation: the fortifying of the USD gives US family units fortune gains, as imports will end up less expensive, however will be a mishap for US exporters, particularly the ones transporting their items to Chinese shores.

In the course of the most recent decades, numerous Western organizations have moved parts of their production houses and offices to China. This was for the most part identified with a near work cost preferred standpoint, which implied that on equalization it was less expensive to create in China than, for instance, in their own nation because of the cheaper labour rates perfectly complemented by the exchange rates between their nation and CNY. Because of rising wages, especially in the waterfront zones of China, a portion of the organizations have made a move to other developing economies in the district (for example the Philippines or Vietnam), which are still at a prior phase of their monetary advancement, along these lines benefitting from a moderately low compensation advantage contrasted with China. These sorts of movements are a medium-term key story. All things considered, such reallocations are a tedious and expensive procedure, particularly when settled resources are included. Because of the expanded pressures among China and the US, this procedure appears to have quickened. For instance, different reviews demonstrate that an ever-increasing number of organizations are thinking about a migration [10]. Moreover, the exchange war appears to prompt an expansion in outside direct interest in Southeast Asian nations [11].

Work profitability development is the most essential mainstay of monetary development. There is an immense strand of writing that demonstrates that exchange significantly affects efficiency. To start with, information grew abroad emphatically influences residential efficiency, however these overflows are not programmed or exogenous.[12] Well-known courses of worldwide learning overflows are human capital versatility [13], outside direct speculation [14] and exchange [15;16;17]. Exchange encourages outside learning overflow impacts, as firms can utilize remote created middle sources of info [18;19] Besides, downstream clients can figure out advances typified in creative last imports and utilize this information in their very own generation forms. These components appear to be substantially more vital for China than the US, as the last still has a vast innovation lead over China.

In any case, US profitability is likewise influenced straightforwardly by the Chinese-US exchange relationship, as receptiveness to remote exchange encourages advertise rivalry, which invigorates firms to lessen their X-wasteful aspects and increment endeavors to innovate. In this sense, import rivalry will result in progressively inventive, increasingly productive firms (the inside firm impact). Besides, there are part creation impacts (the between firm impact): lower exchange costs will result in reallocation of work and capital toward increasingly gainful and ability escalated firms inside areas and toward aptitude serious divisions in all nations [20]. These discoveries are in accordance with Bernard, Redding and Schott [21], who find that inside and between-industry reallocations of monetary movement amid times of exchange advancement brought normal efficiency up in all ventures, however more so in the relative preferred standpoint businesses.

For European firms, Bloom, Draca and Van Reenen [22] locate that Chinese import rivalry has expanded specialized change inside European firms (inside impact) and furthermore caused a move of work towards mechanically further developed firms (segment sythesis impact). Taken together, these impacts represent 14% of European innovation updating in the period 2000-2007. Different examinations that locate a strong direct beneficial outcome of worldwide exchange on efficiency are by Edwards [23] and Alcalá and Ciccone [24].

As exchange beneficially affects work efficiency advancement, a pullback in exchange brought about by higher exchange expenses ought to adversy affect profitability. We will come back to this subject all the more broadly when we will talk about the efficiency models for both the US and China.

Trump previously alluded to China's uncalled for exchanging and financial works on amid his decision battle in 2016, yet it took a year prior to his organization fortified this enemy of China talk by usage of genuine protectionist approaches. The postponement was likely identified with China's key job in the contention between the US and North Korea [25]. Because of this job, it was normal that China would be less eager to participate with the US against North Korea if there should be an occurrence of respective exchange strains, for instance by following up on worldwide assents against the North Korean routine.

Before the US chose to additionally fix the chains on China by presenting more duty bundles , a few rounds of reciprocal dealings and negotiations occurred. In their announcement going back to May 2018, China invested in import more merchandise from the US, particularly rural and vitality related items. China would likewise give careful consideration to the security of licensed innovation privileges of US organizations working in China. In spite of the fact that this result was at first viewed as positive, it before long turned out to be certain that China's promises were not actually lined up with the requests by the Trump organization. That is the reason the US kept on fixing the screws by actualizing another round of taxes, focusing on USD 50bn of imports from China, which thusly prompted a comparative striking back by China . In the mean-time, no different rounds of dealings occurred between the opposite sides. In the most as of late introduced bundle by the US of USD 200bn presented in September, three stages are obvious. After the 'first' round of 10% taxes on USD 200bn, the tolls will be expanded to 25% starting at 1 January. In the event that China strikes back, the US is additionally arranged to force collects on another USD 264bn worth of Chinese fares, which as a result makes all fare from China to US shores subject to a 25% duty. These are primarily customer (electronic) items.

In their latest World Economic Outlook of October 2018 [26], the IMF draws up the conceivable effect of the US-China exchange war by utilizing their purported Global Integrated Monetary and Fiscal Model (GIMF) for a situation ('layers') investigation. It expands on four recently portrayed situations in a July 2018 G20 Surveillance Note [27]. Their first exchange war situation incorporates levies that as of now have been executed. In a second situation, the IMF includes the proposed increment of US levies from 10% to 25% on USD 200bn USD of Chinese fare by the start of one year from now. A contrast between our examination and the IMF, is that the IMF likewise expect countering by other exchanging accomplices (for example Europe) beside China, and evaluates a situation where the US chooses to actualize taxes on autos. Therefore, the IMF finds a bigger effect in the (multilateral) exchange war situation on the US than on China. The levy stuns in the distinctive situations are lasting, and they incorporate likewise certainty and venture impacts by accepting an expansion in hazard premia for cutting edge economies (30bps) and developing markets (60bps) so as to reflect generally higher monetary vulnerabilities. The investigation does, be that as it may, exclude any powerful efficiency impacts or non-tax striking back by China and it is discovered that the effect for China is greater than for the US in the short-run, yet not in the more drawn out run.

The National Institute of Economic and Social Research (NIESR) takes a gander at the potential exchange war impacts by proceeding prior research of Liadze [28], Hantzsche and Liadze, Carreras and Ramina and Liadze and Hacche. They likewise join the latest round of duties and run recreations utilizing NiGEM. Accordingly, they utilize a comparable econometric model, however utilize distinctive presumptions. They stun similar situations exogenously, however these stuns are not viewed as lasting as the stuns are just connected from 2018Q3 till 2020Q4, accepting that costs will modify after that period. Their outcomes point to marginally more grounded negative effect on the US contrasted with China, however this is because of contrasts contrasted with our suspicions and situations. Most eminently, we incorporate exogenous remote trade advancements and unfavorable potential profitability impacts, where NIESR abstracts from these impacts. Also, we evaluate a further heightening of the respective exchange war (counting NTBs), while NIERS just survey the right now forced protectionist estimated.

The exchange war situation examination by the European Central Bank (ECB) is distributed as a component of their financial notice going once again from September 2018. By utilizing the IMF's GIMF show just as their own worldwide model [29], the ECB surveys both the exchange and certainty channels by which the economy may be affected by the present exchange war. It is, in any case, essential to take note of that this investigation does not survey a US-China exchange war, however, looks at a worldwide exchange war where the US forces duties on all imports and all exchanging accomplices will respond these protectionist US gauges. Besides, the investigation expect that the exchange pressures will ease going ahead and will keep going for a long time. At last, trade rates and money related strategy are displayed endogenously. The ECB likewise makes a refinement among immediate and roundabout exchange impacts, by moreover assessing potential certainty and budgetary market impacts, by displaying a fixing of money related conditions accepting an expansion in security premia by 50bps and a financial exchange decrease of two standard deviations in all nations. All things considered, the effect on exchange from dynamic efficiency impacts isn't secured here either. What's more, one noteworthy distinction with every other investigation talked about here is that this examination considers a full striking back of other exchanging accomplices against the US. This clarifies the moderately higher effect on the US economy contrasted with China, as the last can profit by substitution impacts.

The Netherlands Bureau for Economic Policy Analysis (CPB) examined the potential exchange war by utilizing distinctive situations [30]. WorldScan, a purported computational general harmony (CGE) model of the world economy, is utilized to gauge and include an examination on an (inter)national and sectoral level. The CPB considers recently introduced bundles and makes suspicions on approaching bundles, by utilizing five unique situations, fluctuating from exclusively steel and aluminum taxes, to thump on heightening situations where taxes from both the EU and China versus the US are introduced, and the US even participates in exchange wars with all OECD nations. Demonstrate particulars incorporate a combination of purported immaculate and flawed challenge systems and the task of various versatility classes. These depend on the suppositions that generally low flexibility levels should yield bigger monetary misfortunes and that the antagonistic effect is bigger under a situation of blemished challenge. Then again, the investigation does not demonstrate a particular appropriation of the effect after some time. It just thinks about what the effect may be of a changeless stun up to and including 2030, with the last-referenced year as the reference point contrasted with the pattern.

By the end of July 2018, the stance of the United States president, Donald Trump, was quite clear towards China. And yet new developments continued as the year went by [3]. China was continuously pushing for the “Made in China 2025” campaign and that was the central topic of discussion in many of the debates in the US senate. Everyone wanted to device a best approach for creating tariffs on Chinese goods so that the United States of America continued to be the word supreme power in terms of economic strength.

The series of tariffs imposed till June led to a sharp devaluation of the Chinese yuan against the dollar. The drop was approximately 3.7%. At the same time the US president tweeted that the devaluation was a result of the manipulation of the Chinese government on purpose. He accused both China and EU for decreasing rates to counter the strengthening US dollar which could prove detrimental to the US economy. At this point of time it was clear that the US China trade war was not a bilateral issue and rather affected multiple nations. At the very least it was being accused of impacting the interest rates in multiple nations which is one of the major factors that impact the stock markets as a whole. This goes ahead to show that the trade war did have a short-term impact on the global stock markets and not just the nations involved bilaterally.

Inge [4] uses the large economic trade model to explain the same. In his paper he has assessed the impact of the trade war not just using the trade model but also studied the impact on the nations from a perspective of labour productivity development. His predictions are aligned with the general perceptions towards any war. A trade war generally leads to an economic loss and the net sum at the aftermath of a trade war is always lower than where it started from initially. He states that the largest impact of these losses is generally concentrated in the involved parties ( which in this case are US and China), however there is a negative impact on the third parties as well. His model goes ahead to show that in the long run, by 2030, the growth in the global economy will be visibly lower than what it would have been in a trade war free world.

Among the involved parties in a trade war as well there is generally one which has much more to lose and another which is a comparative winner. The model predicted by Erken [4] shows that China will be the one which will take the larger portion of burden generated by the trade war. The research does not deny that there will be a negative impact on USA as well but the economic decrease in USA will be les than half that of China.

Methodology

One of the promises made by Donald's during the US presidential election was to limit and rather stop the abuse of trade practices by China towards USA. The assault began in January 2018[2] when USA imposed 30% tariffs on solar panel imports, a majority of which originated in China. Another set of tariffs came on July 6 when 25% tariffs were imposed on $34 billion of imported Chinese goods, closely followed by an additional addition of $16 billion in mid-August. In august 2017 itself the estimated cost of theft of intellectual property was above $300 billion. In addition to that there is a trade deficit of more than $500 billion a year with China.This has led to a tit for tat response from China as well. The first set came on April 2 when a tariff was imposed on 128 products it imports from America[2].

Though anticipated the imposition of tariffs always comes as a shock to the market. Apart from the actual imposition of tariffs a lot of market shocks could be linked to just the announcement of probable tariff and their news. Thus, the methodology used in the paper will be an amalgamation of both statistical models and an empirical study approach for measuring the impact of new on the stock index values.

Sample Size

When analysing the effect of the trade war it is necessary to have a sample that is completely diversified in both regards:

  1. The nations analysed
  2. The range of data period

The choice of data range has been discussed in detail in the later section, here we discuss the choice of nations. The announcement of any tariffs from either side USA of China) will have both positive and negative impacts of different nations.

To give that context assume USA imposes tariffs on the import of electronic devices from China. Then, it is uncertain if that will cause a good or bad impact on the stock markets of USA. But, the stock prices of organisation exporting electronics devices to China will definitely take a hit and in-turn the whole stock market of China. The stock market of nations which export raw material of electronics like lead will also take a hit. Thus, both China and the lead exporting nation will take a hit and we can call them news losers. At the same time a nation C might see a rise in their stock market which is likely to get more requests for exports of electronics devices. We can call this nation a new winner. Hence the sample needs both news loser and news winners.

While, considering the impact of trade war it is necessary for the research to accommodate for the fact that all the nations might not be impacted by the trade war between the United States of America and China. Thus, the sample should contain neutral nations which remained reluctant to the trade war. Such nations act as a control element for the news losers and news winners. The trade war is not the only factor changing the stock prices of national indices. The control indices will help remove other common shocks apart from the trade war. The list of the 30 nations chosen for the purpose of the research are present in Appendix 1 – List of elected countries and the Stock Indices.

Data Source

For any methodology to work and give reliable results it is necessary to have all the data in a similar format and along the same period. Thus, the websites of various country indexes are not a suitable as there might be data inconsistencies. Some websites use dividend adjusted returns whereas the others prefer raw index prices. The choice of a data source is of utmost importance in the regard that both the statistical and empirical approaches rely on the accuracy of data and how precisely it has been measured. Thus, the choice of source has been a common aggregator site called investing.com[1]. The site also provides the data for almost all of the major indexes of the world and the data is present for the required period as well. Another benefit of using a single site lies in the fact that the concern of the indices being dividend adjusted or not is removed as all the data is treated as the same and thus in that case the data is directly comparable for the purpose of our analysis irrespective of the data handling methods that the website uses.

Data Period

The first set of regulations for imposing tariffs on any imports from either side came in the month of January 2018 by USA thus, that can be assumed as the beginning of the trade war. The data has been collected till 19th October 2018. The whole period is termed as the period of trade war as the differences are yet to be settled and regulations and tariffs have been imposed even in the month of September 2018 [2]. A control period is required for the effect of trade war. The time period from January 2016 to December 2017 has been chosen as the control period. Daily index prices have been used to cover up for the lack of data point from the short duration. The duration of the research has been kept low as before 2016 there were other global economic factors which might interfere with the research like the European Sovereign Bond Crisis. Thus, the data period of the complete research is from January 3, 2016 to October 19, 2018 divided into the period of the trade was and the neutral period.

Statistical Techniques

Multiple statistical techniques have been employed to check the impact of the news of tariff imposition on the stock market prices of the equity indexes of various nations. The first of them has been used to analyse the impact of tariffs on the returns of the indices. After that we will move forward to see the change in the market risk that arises due to the trade war and in the end, we analyse the impact of the trade war on the phenomenon known as contagion.

T-test

The hypothesis being tested via the t-test here is that there is no significant impact of the news of tariffs on the returns of the indices.  The t-test is a statistical tool which can be used to examine the means of different populations. A simple two sample t-test can be used to compare the mean of two different populations. The test can be used when we do not know the variances of both the populations and even in case of a smaller sample (sizes less than 30 even)

F-test

The hypothesis being tested via the use of an F-test is that there is no significant difference between the volatility of returns before and after the imposition of tariffs. It can happen that the return of the indices remains the same thought the risk in the market changes and an F-test will help us identify that. It is used to test the F distribution for the null hypothesis. F-test is best appropriate when the data is fitted to the population using least squares and that is similar to what is done in calculation the variances of the population.

Correlation

The hypothesis being tested here is that whether trade war has led to an increased spill over effect or contagion in the global stock markets. Correlation is a statistical technique use to see the movement of one variable with respect to the other. We will use Pearson’s Correlation to calculate the correlation coefficient that ranges from -1 to +1. -1 represents a complete negative correlation which means that a change of 1% in the first variable means a change of -1% in the second variable. A correlation of +1 means a complete positive correlation which that a change of 1% in the first variable means a change of 1% in the second variable. The formula for calculating the Pearson’s Correlation is as follows:

Correlation = Cov1,2/(StdDev1*StdDev2)

Where Cov1,2 is the covariance between variable 1 and 2

StdDevi is the standard deviation of the ith variable

Method Used

Initial Impact Assessment (January 2018)

The daily closing price data for all the 30 indices from January 2016 to October 2018 has been collected from investing.com. The time period of the study has been classified into two parts: the pre-war period that ends at December 2017 and the trade war period.

The analysis used the following two approaches:

  1. The logarithmic returns of the indices have been calculated using the closing price of the indices the previous day using the data of the entire period under study.
  2. Then the effect is estimated from the first news of imposition of tariffs that was on 22 January 2018 by taking the average return of short, medium and long term.

Our classification of short, medium and long term is as follows: the duration short term is 10 days before and after the imposition of tariffs, similarly medium term stands at 20 days and the long term stands at 30 days. At this point it should be clarified that the 10, 20 and 30 day internal refers to calendar days ad not working days. In case of the 10-day interval, which represents the short-term impact of the trade war, the number of data points for a given index is limited to 7 in general as there are only 7 working days in the 10 days chosen period. In other words, the stock market was open for only 7 of the 10 calendar days instead of all 10 days. Similarly, in case of the medium-term analysis the actual number of days is only 15 instead of 20 and for the 30-day long-term analysis only 19 data points have been used. The reason for using calendar days instead of using actual working days of the stock market is that the analysis is based on the impacts of the shocks from the news of the trade war. Thus, in case of news shocks even the non-working days counts. Even when there is no trade in the stock market there is news about the trade war and that is capable of impacting the stock market returns in the same way as it would affect the stock market if the trade was still going on. Thus, the calendar method is deemed more suitable than the working day count of the days. However, which calculation of the degrees of freedom and any other relevant parameter for the statistical tests the actual number of the working days has been taken into account and the calendar method has not been used for the sake of mathematical consistency.

The method for calculation of returns is as follows:

I = ln (P­i/Pi-1)

Where,

ln is the natural log of a number.

Ri is the return of a value (index) for the period/date i

Pi is the closing price of the index on period/date i

Pi-1 is the closing price of the index on period/date i-1

  1. Similar to the average returns before and after the initial news of January 22, 2018 we have calculated the variance of the index returns in the short, medium and long term before and after the first news of imposition of tariffs.
  2. To compare the average returns we have applied a paired t-test
  3. To compare the variances an F-test has been used.

The F statistics is the ratio of the variances of the two populations under study. And the t-test is the ratio of the difference between the expected mean and the observed value and the standard error which was calculated keeping into account the actual number of working days used. As there is no standard mean value that can be referred in this case. The returns of the stock markets that were present in the pre-trade war period have been used as the baseline and the difference of the returns before the and after the announcement of the trade-war has been used as the proxy for the same.

Contagion Analysis

Further we wish to analyse if there is an increase in the correlation between the world markets after the beginning of the trade war. For the same purpose we divide our data into two periods. The first period is the period leading up to the trade war. In all of our data the period leading till the trade war will be the data till December 2017 as the uncertainty of tariff became high in January 2018. The time period from January 2018 to October 2018 will be used as the period of trade war.

Correlation among all the selected countries will be calculated for both the periods separately and then compared. The purpose of the process here is to make an empirical analysis of the correlations between the stock market index returns if it has changed during the trade war.

Empirical Analysis

The individual news events and their probable impact on any stock market has been analysed. The process used is simple. The returns of the markets around all the tariff events were plotted and any significant change in the stock markets during such time was highlighted. For the same all the news events have been analysed for any outlier in data and if any return can be spotted which is out of the ordinary. A simple scatter plot is used for the same purpose which can quickly highlight any outlier during such an event. The purpose of the empirical analysis is to show the extent of effect the trade war can have on the stock markets of other nations.

Data Analysis

News Events and Empirical Analysis

The following is the timeline of the news events from USA and the reaction of Chana for them. The news events can be linked to the correlations discussed in the later sections and how the adverse effect of the news events can lead to a contagion on the other countries of the world. All the dates are for 2018

  1. On January 22 USA imposed tariffs on Chinese solar panels and cells and a 20-50% tariff on the parts of South Korean washing Machine. In a response to the same the Commerce Ministry of China initiated an anti-dumping and anti-subsidy investigation into the US sorghum on February 4
  2. On March 2, a 25% tariff on steel import and 10% tariff on aluminium imports was applied to all the nations from which even allies were not exempted. This was the first instance of a direct impact of the trade war on other nation. In response to that EU imposed a $3.5 billion package penalty to US exports including motorcycles like Harley-Davison and garments like denim
  3. US keeps Canada and Mexico exempt from the NAFTA deals and allows other nation to negotiate tariff reductions on March 8. A quick reply from EU and China came on March 9 with China urging US to reduce tariffs and EU threatening another $3.5 billion worth of tariffs.
  4. On 3rd and 5th April US threatens to impose tariffs on a total of $150 billion worth of imports. As a response China threatens to impose the same number of tariffs on April 3. It mandated Shorghum importers to pay 178.6% of the net value of US imports they make.
  5. On 29 May US again takes an offensive position against China. On May 31 US imposed steel an aluminium tariff on EU, Mexico and Canada. In response, on June 5, China offered a purchase of $70 billion worth of US products if US stopped tariff threat.
  6. From June 14 to June 19 another 25% tariff imposed on $50 billion worth of Chinese imports and a total pf $200 billion of Chinese goods put under scrutiny. On June 15 China says it will impose 25% tariff on $50 billion of US goods.

From the above data we can see that it is not just China which has been affected by the trade-war, but the effect has also spilled over to other nations, specially Canada, Mexico and EU. Thus, an escalation in trade war might possibly impact all the stated nations.

Initial Impact Assessment (January 2018)

Here we first test the hypothesis that trade was does not have any impact on stock market returns. The hypothesis can be stated as follows:

Ho: The mean return of the stock market is same before and after the beginning of trade war

HA: The mean return of the stock market is same before and after the beginning of trade war

The hypothesis is tested for all the three-time ranges, i.e. the short term, medium term and the long term. We as the researcher want to be 95% confident about our analysis and thus we choose and alpha of 5%. The test chosen is an F-test because the sample size is less than 30 for all the three decided periods.

Appendix 2, – Short, Medium- and Long-Term returns before and after January 22, shows the average return for the short medium and long term before and after the first news of January 22. A general overview of the returns makes it apparent that foremost of the indices the returns after the news announcement are lower than the returns before the news announcement. Thus, our initial analysis says that there is a difference in the stock market returns. But the confirmation of the same is only possible via the use of a paired t-test. The critical value for 10-day return is 2.365, for 20 days return it is 2.131 and for 30 days it is 2.101. Table 1 shows the results of the t-test conducted for each country.

Table – 1: The calculated t-scores for short, medium- and long term returns of the country indices

 

Last 10 days return & Next 10 days return

Last 20 days return & Next 20 days return

Last 30 days return & Next 30 days return

Australia

5.08619718

4.347612

4.874822

Belgium

2.84517923

6.177053

5.347584

Brazil

2.54554443

5.788935

5.445049

Canada

3.93792947

3.982923

5.495489

China

7.38518168

3.715571

5.08297

Egypt

3.57472134

6.142359

6.160804

France

6.77938608

6.823034

7.029084

Germany

5.74665706

7.422415

7.115684

Hong Kong

3.4537522

3.754696

4.33161

India

6.42024754

4.764006

5.049432

Indonesia

2.9904982

3.714677

5.615209

Italy

3.32106302

6.355041

6.672803

Japan

5.18660977

4.958671

5.181839

United Kingdom

2.41054828

4.774059

4.226657

Malaysia

2.81028358

4.067588

5.303147

Mexico

4.31333112

4.78928

5.638873

Netherland

3.83704154

5.742018

5.857869

Oman

2.62208501

4.531038

5.069407

Pakistan

10.0940844

5.961303

7.808547

Poland

2.51869341

3.616732

7.078546

Russia

3.70044222

6.403473

7.044627

Singapore

2.72590731

4.492043

5.42321

Saudi Arabia

2.72590731

4.492043

5.42321

South Africa

2.34896273

4.120129

4.586655

South Korea

3.46531463

6.264735

5.854835

Spain

2.36281718

6.48857

7.291208

Switzerland

2.01303506

5.484796

5.202552

Taiwan

2.74973522

3.540532

3.831016

Thailand

2.41054828

4.774059

4.226657

USA

4.19308376

3.502524

4.217555

 

From Table – 1: The calculated t-scores for short, medium- and long term returns of the country indices it is very evident that except for three countries all other countries see an impact of the trade war in their stock market returns. The three countries, namely South Africa, Spain and Switzerland, were not impacted by the trade war in the short run. The causes for the same can be multiple ranging from the investors in these countries from being indifferent to the trade war to a domestic shock neutralising the impact of the trade war. These three countries also have been impacted by the trade war in the long run as we can see that there is a significant difference in the mean for medium- and long-term impact.

Hence, we have enough evidence to reject the null hypothesis that the trade was does not impact the stock market returns at least in the medium and long term. We accept the alternate hypothesis that there is an impact of the trade war on the stock market returns. For short term we reject the null hypothesis for 27 countries and do not reject the null hypothesis for 3 countries. From the above analysis it is evident that a trade war not only affects the involved countries in the trade war but also the rest of the world. There is a significant impact on the long term on all the stock markets that have been selected. However, the analysis is not enough if only the significance of the impact has been analysed. A trade war can also be used by nations to improve their stock market conditions and such nations will emerge as the news winners. A news winner nation will be the one which has seen a significant increase in its stock market returns after the trade war. We now proceed to analyse if the impact is positive or negative for the countries.

Table 2: The direction of impact of the trade war

Country

Short Term

Medium Term

Long Term

Australia

Positive

Negative

Positive

Belgium

Negative

Negative

Negative

Brazil

Negative

Negative

Negative

Canada

Negative

Negative

Negative

China

Negative

Negative

Negative

Egypt

Positive

Negative

Negative

France

Negative

Negative

Negative

Germany

Negative

Negative

Negative

Hong Kong

Negative

Negative

Negative

India

Negative

Negative

Negative

Indonesia

Negative

Negative

Negative

Italy

Negative

Negative

Negative

Japan

Negative

Negative

Negative

United Kingdom

Negative

Negative

Negative

Malaysia

Positive

Negative

Negative

Mexico

Negative

Negative

Negative

Netherland

Negative

Negative

Negative

Buy answer (USD30)Download Questions

Abstract Trade war results in fall in market all over the world as well as decreases the return of a country. Trade war mainly affects the stock market to a great extent. As trade war grows in a country, the risk of uncertainty in the stock market also increases. In this context, trade war results in decreasing the market share of international trade and increases the market share of domestic trade. This study has evaluated the impact of trade war between Trump and China on share market. In addition to this, trade war can be attributed to the phenomenon known as protectionism. Protectionism affects the competitiveness of the domestic market against the international market. As a result, it has a huge impact on the monetary development as well as economic growth. Work profitability development is the most essential mainstay of monetary development. In this context, various methodologies have been adopted such as sample size, data source, data period as well as statistical techniques. Where sample size is the list of 30 nations selected for the research. Data sources are taken from the websites of various countries and the data period for the research is from January 3, 2016, to October 19, 2018. Statistical techniques used in the research are the t-test which can examine the means of different population, f-test to calculate the variances of the population and correlation to calculate the standard deviation of the variable. Various methods have also been used such as initial impact assessment, contagion analysis as well as empirical analysis. Data analysis has highlighted the calculation of t-test in the short, medium and long run. The table evidences that all the countries except for three countries experience an impact of trade war on the stock market returns. On the other hand, the factors highlights that all the countries except Oman show a positive effect of trade war in the country. Apart from this, it shows the most significant impact on the volatility in the medium term. Thus, trade war shows change in their market returns in the medium as well as long term.

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