Last week the US President tweeted: “When a country (USA) is losing many billions of dollars on 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!”
The rhetoric is unacceptable, his tone as un-presidential as you can imagine, the dangers are worrisome indeed. Just maybe though, out of the chaos that could ensue, some good could emerge. Investors need to watch this one pan out with close attention.
The plan is for the US to impose 25 per cent tariffs on imports of steel and 10 per cent on imports of aluminium.
Steel and aluminium account for about two per cent of world trade, so at face value this is not a disaster for the global economy - although there will clearly be some losers. Among emerging markets, Bahrain is vulnerable, and to a lesser extent so are other Gulf countries.
The biggest exporters of steel to the US are Canada and the EU, with The Netherlands and Germany particularly large steel exporters within the EU. There are around 320,000 jobs in the EU steel industry. (You may recall that the original name for the EU, before it was called The Common Market, was the European Coal and Steel Community.)
Certain companies, Rio Tinto, for example, (shares down four per cent in the last few days) are vulnerable too.
But the Trump threats go further, he is also planning to brand certain countries as currency manipulators - Thailand, South Korea and of course China may fall under that description, risking some kind of action by the US.
Risk of trade war
European Commission president Jean-Claude Juncker said: “We strongly regret this step, which appears to represent a blatant intervention to protect US domestic industry and not to be based on any national security justification.”
He continued: “The EU has been a close security ally of the US for decades. We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk.”
Canadian Foreign Minister, Chrystia Freeland said: “We will always stand up for Canadian workers and Canadian businesses. Should restrictions be imposed on Canadian steel and aluminium products, Canada will take responsive measures to defend its trade interests and workers.”
And Jean Simard, chief executive officer of the Aluminium Association of Canada said: “The President has just initiated an all-out trade war.”
Risks to the US
While tariffs on imports might help protect some US jobs, bear in mind that tariffs mean higher prices paid by consumers, and far more US jobs are employed in industries that rely on cheap aluminium and steel imports than in the US steel and aluminium industries themselves.
If the EU and Canada respond with tariffs on certain US imports, the effect will be job losses in the US, but more worryingly, risk a downward spiral as the US retaliates to EU retaliation, and the EU no doubt retaliates to that.
An even bigger fear relates to the holding of US assets, especially treasury bills by non-US countries.
Roughly $14 trillion of US treasuries are outstanding, of which 29 per cent is held by foreign countries, with China and Japan holding in-excess of $2 trillion.
It would seem somewhat masochistic of holders of these bonds to deliberately force down the price as punishment to the US, the phrase ‘cutting off your nose to spite your face’ comes to mind, but the US will probably need to borrow a further $1.5 trillion to fund the Trump tax cuts.
We are in danger of seeing an interest rate perfect storm, with the FED possibly set to increase interest rates at a much faster rate than previously planned, to stop the US economy overheating, whilst normal purchasers of US bonds hold back - forcing up the yield on treasuries, making the cost of servicing US private and public-sector debt prohibitively high.
US not a victim
The idea that the US has been a victim of other countries trading policies, made a fool out of by WTO negotiations, is seen by many governments around the world as a joke - ask trade negotiators for emerging countries if the US is a soft target - the resulting din of sarcastic laughter would be enough to burst the ear drums of an already partially deaf anti-globalization lobby.
The US, just like the UK, does not have a giant trade deficit because of poorly negotiated trade deals, rather because both countries have excessively low savings ratios, supported because foreigners are willing to lend the respective countries huge sums of money.
In one respect
But in one respect, Mr Trump has a point. The savings ratios in countries such as Germany and China are too high - if all countries saved at the German or even the higher Chinese rate, the global economy would descend into economic depression.
In that respect, countries with massive trade surpluses are free riding on other country’s spending.
In 1944, Keynes proposed a way to dis-incentivise trade surplus countries at Bretton Woods.
The global economy can only be put on a sustainable footing if a similar idea is adopted today, otherwise we will lurch from one credit crisis to another.
If, by some miracle, the Trump rhetoric can lead to some kind of Keynes style outcome, it may eventually be worth it. But I doubt that Trump understands this, let alone is planning for such an outcome, and whatever the result economic pain will be the short and medium-term result.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.