Today is the day. By the time you read this, the temporary exemption to Donald Trump’s tariffs will expire. Much of the world will be subject to steel and aluminium tariffs when exporting to the US. Ironically enough, it’s also International Workers’ Day.
The British media is ghostly silent on the biggest threat to your wealth right now. If the world reacts badly to Trump’s gambit, the real trade war could sink the stockmarket in no time. Not to mention freezing up other financial markets.
So far, the reaction to Trump’s agitating has been mixed.
South Korea is exempt from Trump’s tariffs after agreeing to renegotiate its trade agreement.
Angela Merkel’s government released a statement that Emmanuel Macron and Theresa May all agreed Europe should defend itself as one. It seems Merkel and Macron’s recent visits to Washington didn’t help the situation. The EU’s trade commissioner called the US commerce secretary yesterday to avert disaster. But that didn’t work either.
Tariffs on American motorcycles, jeans, orange juice, bourbon, and peanut butter are in the works at the EU. No doubt the EU parliament’s bars and office kitchens are stocked up already.
Brexit complicates things here in the UK. May is stuck between a rock and a hard place. Trump wants Britain out of the EU trading bloc, while the EU wants us to stay. The Americans are keen to negotiate new deals already, while the EU is trying to prevent negotiations until the Brexit deal is complete.
The battleground inside the UK is heating up too. Already the anti-trade movement is politicking and lobbying. The chairman of the International Trade Committee warned that we don’t even have estimates of the benefits of a trade agreement with the US. An SNP MP agreed that the benefits of trade with the US are “unproven” and argued that a deal with the US would throw up barriers to trade with the EU.
This sort of nonsense only exposes the absurdities of trade policy itself, and the EU. If a UK trade agreement with the US causes problems for the EU, it is obviously an anti-trade bloc we should escape from. And putting the benefits of free trade into question exposes the mercantilist machinations at work in British industry.
Existing trade favours the EU, so big business will push for ties there over ties with the US. But consumers and future companies benefit from trade liberalisation, while big business does not. If we let big business control trade policy, the benefits of Brexit will diminish. We’ll end up a protectionist country that might even have been better off inside the EU.
Trump’s trade war targets
Steel is not the only front that Trump is fighting on. Take olives, for example.
Californian olive farmers have long been complaining about the subsidies that Spanish olive farmers get under the Common Agricultural Policy. Trump set the wheels in motion to challenge the olive imports under anti-dumping rules.
Brussels went berserk. It accused Trump of attacking the Common Agricultural Policy of Europe and pointed out that other nations might also object if the US gets away with it.
Which is of course entirely correct. But the issue here is the illegitimacy of European policy, not the American reaction to that policy. The fact that other nations will complain too gives it away. They’re right!
This sort of misguided rhetoric is common in trade policy. People swap between economic sense and nationalist nonsense at will. It creates some hilariously stupid contradictions.
To avoid the metals tariffs set to come into effect today, Trump had demanded export quotas from the EU. Countries would only be allowed to send 90% of the amount of metal they had been exporting to the US.
Among the dumbest things I’ve ever read is this sentence in Bloomberg’s article about the metals negotiations: Trump’s “demand is also contrary to the entire trade philosophy of the 28-nation bloc, which is founded on the principle of the free movement of goods.”
You WHAT? The EU is founded on protectionism. It is one of the most trade restrictive blocs in the world according to the World Trade Organisation’s classifications. The EU is about locking out the world for the benefit of French farmers and fallow fields.
Arguing that free trade exists within the EU, so quotas for export to the US are against its philosophy, is utter nincompoopery. The US is not in the EU. It is subject to the EU’s severe trade restrictions and can’t compete with subsidised European industries. Trump is threatening the EU with tariffs in retaliation for the EU’s trade restrictions and subsidies.
Bloomberg’s argument makes no sense if it was applied to the US. Imagine saying this: the union between the states features free movements of goods, so it’s against the US’ principles to implement trade policy with the EU… Ridiculous.
For all the free trade agreements Europe makes, consider that these are only necessary in the first place because of the high levels of protectionism the EU implements.
Trump explained all this, in his own bizarre way, in a recent speech:
“[The EU] literally formed to take advantage of the United States and I don’t blame them. I don’t blame them, I don’t blame President Xi, I don’t blame Prime Minister Abe of Japan.
“I don’t blame the heads of these countries for taking advantage of us, I blame past Presidents and past leaders of our country.”
The media’s mangling of the narrative isn’t the real issue here. Although it does interfere with the functioning of democracy and accountability.
The real issue is the fallout. That could be financial market mayhem.
Will Trump’s “negotiations” backfire?
What’s going on at a higher level is fairly simple. Trump wants trade that benefits the US more. He calls it “fair”. And on many counts, he is correct that the US has benefited less than many other nations.
His wild threats are negotiating tactics. By creating an enormous drama that he can later back down on, he can achieve what he actually wants on the side: a renegotiation of trade deals.
South Korea figured this out quickly and complied with Trump’s demand to renegotiate their trade agreement. The Mexicans and Canadians are revising the North American Free Trade Agreement.
The same negotiating tactic was used with North Korea, by the way. Trump’s threats triggered a change in policy towards the south. Ironically, South Korea’s president now suggests Trump deserves a peace prize for his angry tweets. Iran is getting the same treatment now as North Korea was.
The problem is that Trump’s bluff and bluster could very well go wrong one of these days. He’s repeatedly betting the other side will give in if he raises the stakes sufficiently, be it on war or trade. But this leaves the stakes raised if something does go wrong.
If Europe or China calls the bluff and refuses to renegotiate trade, or if Iran does the same on nuclear arms, will Trump really pull the plug? It’d be a big escalation in the trade war and geopolitical war.
By giving the world today’s deadline on his steel tariffs, Trump tried to frame the issue as a failure on the part of Europe and China. If they fail to act in the time Trump gives them, it’s all their fault. That’s awfully simplistic.
What are the stakes?
What could go wrong? What’s going to happen if trade wars kick off? Back to Trump:
“So, I am not saying there won’t be a little pain but the market has gone up 40%, 42%, so we might lose a little bit of it, but we are going to have a much stronger country when we are finished and that is what I am all about.”
Having touted his stockmarket success since the election, Trump is now arguing stocks could fall while he strengthens the country’s trade position. After all, restricting trade is a bad thing all round.
Can the world afford a trade war now? The UK economy grew 0.1% last quarter. Europe is slowing fast too, without ever having grown respectably since the financial crisis or sovereign debt crisis. Italy’s lack of government is starting to show in the stockmarket and bond market. Both diverged from the rest of Europe’s trading yesterday.
But all that’s still only the beginning. The transition sequence you can see in history is simple. First you get currency wars – quantitative easing (QE). Then trade wars – happening now. Next come proper wars.
If I might add a stage between the last two, there’ll also be financial wars. Dumping bonds, calling in loans, disrupting digital infrastructure and crashing currencies are now all policies available to economies at war.
Some of these options are also legally legitimate. Nothing forces countries to hold their enemy government’s bonds, for example. If China dumps American government bonds, it could trigger chaos.
If the trade wars escalate, look for deliberate manipulation of financial markets. And be prepared for them.
Until next time,
Capital & Conflict