Trade war on the horizon

Posted By Darren Winters on Mar 8, 2018


Trade war on the horizon

Is a trade war on the horizon? “When a country (USA) is losing many billions of dollars in trade with virtually every country it does business with, trade wars are good and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” tweeted US President Trump.

It would be unwise for investors/traders to write Trump’s tweet off as political rhetoric after all this is Trump’s usual combative stance of advancing or defending one’s interests through conflict rather than negotiations and diplomacy. Moreover, battling from a high-ground where you have a strategic advantage and believe you can most likely emerge as the winner. “Trade wars are good and easy to win,” Trump tweeted.

So this trade war on the horizon might very well be the Trump administration’s preferred choice of battles. If so, then I believe a trade war is on the horizon.

The US is in an enviable position with an abundance of natural resources to feed and fuel itself, a sizeable pool of human capital to create, innovate and consume. Put another way the US economy doesn’t need the world economy to survive. It could still tick over behind a wall of protectionism, albeit not as well. But how long could the world economy survive without free access to the world’s largest consumers?

A trade war on the horizon would monkey hammer trading blocs and globalism.

What would be left? Smaller nations and economies entering into bilateral agreements with the US.

So globalism would then be replaced with Americanism, whereby the US would have the upper-hand steering trade and foreign policy to its advantage. Perhaps this explains Trump’s enthusiasm for a trade war and equally why I believe a trade war could be on the horizon.

But all sides suffer casualties in war. So this looming trade war on the horizon will hurt business and households on both sides of the battleground.

Trade war on the horizonTrump fired the first shot by announcing 25 percent on imported steel and 10 percent on aluminum for “a long period of time.”

“Our steel industry is in bad shape. If you don’t have steel, You don’t have a country!”

Commerce Secretary Wilbur Ross said on Friday the president has chosen to impose the tariffs on all countries and products. The protectionism for strategic industries is often used to justify tariffs and quotas.

The EU then took strategic aim at American iconic brands. European Commission President Jean-Claude Juncker said the bloc is prepared to respond quickly and forcefully by targeting imports of Harley-Davidson motorbikes, Levi Strauss & Co. jeans and bourbon whiskey from the US.

Trump then zeroed-in on the European car makers and pulled the twitter trigger.

“If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S.” Trump wrote on Twitter.“They make it impossible for our cars (and more) to sell there. Big trade imbalance!”.

Germany then wobbled. Steffen Seibert, a spokesman for the German chancellor, Angela Merkel, takes to the stage and says that the government “rejects” the tariffs, adding that such measures could lead to a global trade war, which “can’t be in anyone’s interest.”
So it is easy to see how a tit for tat response to tariffs and quotas by either side can quickly escalate into a full-blown trade war.

A US trade war on the horizon, in theory, might sound good to the protectionists but in reality, trade barriers are detrimental to both the global economy and (equally less known) the domestic economy too.

President Herbert Hoover, back in the 30s was an advocate of protectionism with his
tax levies of up to 50% on imported goods.

What was the result?
Hoover’s protectionism crippled the global economy and accelerated the decline into the Great Depression.

The Reciprocal Trade Act of 1934, which facilitated bilateral trade deals without Congressional approval didn’t mend a long time broke the global economy. It was already too late, with the rise of popular nationalism already well underway in Europe, the seeds had already been planted for WWII.

Another more recent period when a trade war was on the horizon was during the George W. Bush Steel Tariff of 2002.

But a 2002 steel tariff report showed net-negative consequences for US economy, overall. In short, 200,000 Americans lost their jobs to higher steel prices during 2002.

These lost jobs represent approximately $4 billion in lost wages from February to November 2002. More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself (187,500 Americans were employed by U.S. steel producers in December 2002).Every U.S. state experienced employment losses from higher steel costs.

How did US assets perform during the US Steel Tariff of 2002?
The financial implication for asset prices was also negative. This chart shows how the S&P 500 Index, the USD spot Index, and the US Gov. 10 Year yields all declined. So a bear market in stocks could be a deadhead.

In a few words, there is no economic case study which shows that protectionism leads to economic prosperity and higher living standards for anyone. In fact, what we have learned from the past is that protectionism leads to the contrary, recessions, more unemployment, higher inflation. Protectionism contributes to a rising risk of stagflation and political instability.

A trade war on the horizon makes trade a zero-sum game. Moreover, It was the beggar thy neighbor economic policies (where one country attempts to remedy its economic problems by worsening the economic problems of other countries) that led to the Great Depression, political instability and eventually a kinetic war WWII. With a trade war on the horizon are policymakers destined to repeat the same mistake again?

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