Are we headed for a trade war?
Author: Tony Cohen. Source: Wikipedia
The rhetoric from the Presidential election would make you think so. Donald Trump campaigned on renegotiating trade deals with countries around the world. While some of the more extreme measures – like an across-the-board 45% tariff on all imports – would require Congressional action and are therefore less likely, he will have the authority, as President, to pull the US out of the North American Free Trade Agreement or the World Trade Organization without approval from Congress.
And Trump has signaled that he is serious. It appears that Wilbur Ross is likely to be named Secretary of Commerce. Ross has been an outspoken critic of trade deals, saying that they cause the US to import products and export jobs. At the very least, Donald Trump’s election signals an end to any more trade liberalization. Protectionist parties are on the rise around the world, and after the US election and the UK’s Brexit vote, free trade has lost its two biggest national champions.
But there are two sides to every conflict. If we engage in a trade war with China, they will likely retaliate. Punitive tariffs on Chinese electronics would be matched by restrictions on US-made cars and aircraft. And China wouldn’t be limited to tariff increases. In 2010, the dissident Liu Xiaobo was awarded the Nobel Peace Prize. China responded by lengthening quarantine procedures for imported food, causing Norway’s salmon exports to China to fall by 50% the next year. China can also order its state owned enterprises to stop using non-US made goods and services.
Atlantic Salmon. Artist: Tim Knepp. Source: Wikipedia
Donald Trump’s election is just the latest development in the trend of nationalist populism we see growing around the world. While the market has focused on Trump’s stimulus plan and the prospects for increased domestic growth, inflation, and government deficits, the impact of escalating trade hostilities should not be ignored. The Smoot-Hawley Tariff and its aftermath is part of what led to the Great Depression in the 1930s.
Wars aren’t rational. But if our domestic problems refuse to go away, initiating a foreign conflict – even a trade war – has always been a way for politicians to get people’s attention away from home. Let’s hope that it doesn’t come to that.
Douglas R. Tengdin, CFA
Chief Investment Officer