Weekly Digest: Trade wars - Mutually Assured Economic Destruction
02 Jul 2020
After focusing on domestic matters last week, it’s back to the international stage this week as we look at the threat from protectionism.
Why are trade wars back on the political agenda? Once again it is the rise of populist forces that are the prime motivation. As we have discussed in the past, not least when considering the outcomes of elections and referendums, there is a substantial minority of the electorate – certainly big enough to constitute a meaningful swing vote – that feels it has not benefitted from the relentless march of globalisation over the last few decades. Manufacturing jobs, in particular, have been relocated to lower cost countries primarily located in emerging economies, and whole industries and communities have been “hollowed out”. The situation has been exacerbated by the use of unconventional monetary policy since the financial crisis, which has increased wealth gaps by boosting the value of financial assets, which tend to be owned by a wealthier minority. Protectionist policy, taken at face value, is directed at an attempt to level the playing field in favour of domestic production.
So far, so simple. But there is more than a suspicion that Trump’s motives are self-serving. He is under intense pressure from Robert Mueller’s investigation into Russian influence on the outcome of the 2016 election, while also facing the bad publicity surrounding an alleged affair with a star from the adult entertainment industry; mid-term elections are on the horizon in November, with the Republicans facing the threat of losing their majority in the House of Representatives. What better way to shift the narrative and rally the voters than by sticking it to the Chinese? And it’s fairly clear that China is the main focus of his policy, because the EU, Mexico, Canada, Australia, Argentina, Brazil and South Korea were all granted exemptions from the tariffs on steel and aluminium.
|FTSE 100 Weekly Winners|
|London Stock Exchange||3.2%|
|FTSE 100 Weekly Losers|
|Micro Focus International||-49.3%|
|Scottish Mortgage Investment Trust||-7.1%|
However, Trump has decided to take on a formidable opponent, which probably has greater tolerance to sustain hostilities – and the fact that President Xi is not beholden to the whims of voters is a plus for him. China’s exports to the US account for about 4% of Chinese GDP and the trade surplus in goods and services is around 3%. China is growing at a real 6.5% per annum, so has some cushion even if it exports nothing to the US. China is already undertaking massive investment in its “New Silk Road” initiative to broaden trade ties across Eurasia, South-East Asia, and the subcontinents of Asia and Africa, and so has no shortage of new trade opportunities. It also boasts the fastest-growing consumer economy (in terms of money spent), which remains massively alluring for overseas companies who want to do business there. American corporations can already see this crock of gold fading, and are lobbying the president to tread more carefully. Interestingly, the Chinese themselves have been relatively measured in their responses so far.
In reality, a resolution of this spat will probably require that all parties involved “save face” and that Trump, in particular, can project a certain image at home. However, it is also incumbent upon politicians in much of the western world to recognise what is driving the populist agenda and to address issues such as inequality – and this will involve making unpopular decisions, which politicians never like because it reduces the chances of being re-elected. From an investment perspective, greater trade friction reduces overall global growth and tends to create more inflationary pressures, owing to the tariffs imposed and less choice for consumers. It also reduces innovation as domestic companies are shielded from international competition. That is quite the opposite of what we have experienced for much of the last half-century, a period that has been generally kind to investors. It is important that the rest of the world is not sucked into Trump’s drama. Finally, the song Andrew Lloyd Webber won as Oscar for in 1996 was You Must Love Me, from Evita. This week, which body of water lies between the southern tip of Argentina and the South Shetland Islands in the Antarctic?
Year-to-date market performance
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FTSE 100 Index, past 12 months
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