The global trade war has kicked off

With the US now collecting 25% tariffs on some imports from China, we’re now in a global trade war, says John Stepek. Here’s what it means for your portfolio.

China exported around $505bn worth of goods to the US last year

Back in the old days, we all thought we agreed that free trade was good.

One of the few nasties that never quite erupted after the financial crisis despite constant fears that it would was protectionism.

Sure, we had currency wars covert, but polite tit-for-tat devaluations co-ordinated between the world's central bankers.

But we didn't have outright trade wars tariffs, barriers, and all the "buy local" rhetoric that goes with it.

Those days are now well and truly over.

We're now in a trade war

Today (or from midnight last night Washington time), the US government started collecting 25% tariffs on around $34bn in annual imports from China 818 different products in total.

US president Donald Trump has warned repeatedly that the US had back-up plans ("in abeyance", as he put it) for another $200bn in tariffs if China decides to retaliate. He then upped the ante last night, saying that he'd extend the tariffs to pretty much all of the goods that the US imports from China if necessary.

It's always better to get these things straight from the horse's mouth, so here's the full quote: "And then after the $200bn we have $300bn in abeyance, OK? It's only on China." The US imported around $505bn of goods from China in 2017, so basically, that's a threat to impose tariffs on everything China sells to the US.

China has said that will now start charging similar tariffs, although it's not entirely clear what on and whether these have yet come into force.

So that's it. We're in a global trade war.

The reshaping of the global order continues

The trade war is just another symptom of the ongoing reshaping of the world order.

I've talked about this many times before, but I believe there are two main driving forces at work here: the fallout from the 2003 Iraq war, and the fallout from the 2008 financial crisis.

Quick trip back in time: when the Berlin Wall fell and the Soviet Union crumbled, that was it for the Cold War era. Liberal free market democracy had won. It was the "end of history", to quote Francis Fukuyama. Everyone agreed that free trade and democracy were the way forward. The big arguments were over and done with. All that remained was to spread the word to the few remaining holdouts.

When you're winning, you get hubristic. And that's exactly what happened. The end result was the disaster in Iraq. Regardless of your views on the rights and wrongs of the war, the fallout destroyed the moral authority of America and "the West". It's hard to underestimate how costly that loss has been.

However, while we might have lost faith in the idea that we were the "good guys", at least we could still depend on capitalism, free markets, globalisation, and above all, the power of central banks. They were basically sound structures.

And of course, then 2008 happened, and that all went to pot as well.

So in pretty rapid succession, we lost faith in both the morality and the efficiency of our systems. And when core aspects of your system go catastrophically wrong, you start to question the rest of it. The danger grows that both baby and bathwater will be tossed out in the process.

If you think this is too glib an assessment, then I do encourage you to recall that in the wake of 2008, plenty of people were happy to entertain the idea that China might have the right idea in limiting democracy and maintaining relatively tight control over the economy.

So things were bound to change. And from the beginning, that's exactly what electorates demanded. It's easy to think of this process of change as starting with populism and Brexit and Corbyn and Trump, because they are so high profile.

But Barack Obama in the US, was a vote for change. Britain's first coalition government in decades was a vote for change, as was the near-clean sweep won by the SNP in Scotland at the same time. And of course, the big fractures in Europe's model became obvious when the Greek crisis first erupted.

So this process has been going on for a decade now. And it's a necessary process. No system is perfect and some of our old ones collapsed under the weight of their own contradictions.

That's all very well, but what does it mean for my portfolio?

The problem with change is that while it might be necessary, it is also traumatic. And as I said, you might end up getting rid of some of the good stuff along with the bad stuff.

As Christopher Balding points out on Bloomberg, China has not exactly played the global trade game in good faith. In effect, China has opted to have its cake (a centrally-controlled authoritarian society) and eat it (milking the gains from one-sided free trade). So Trump has a point, and it's not even a particularly new one people have been criticising China's theft of intellectual property for decades now.

But just as our belief systems were built on a free-trading world that gradually would move to universal liberal democracy, so a lot of supply chains and companies were built on exactly the same idea.

So change is likely to be disruptive to that. How disruptive? Right now, the impact of these tariffs is minimal. The main issue to watch it seems right now is what happens with car manufacturing. That will set the tone in terms of how big this is likely to get.

But at the margins, this is all inflationary. It drives up the price of everything from labour to parts to commodities. And that will have a significant impact on the sort of backdrop you have to invest against.

I previously looked at what all of this might mean in a recent issue of MoneyWeek magazine if you're not already a subscriber, then sign up here.


How long can the good times roll?

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The charts that matter: the stimulus tug of war continues 
Global Economy

The charts that matter: the stimulus tug of war continues 

As the world's government throw money at their economies, John Stepek looks at how it's affecting the charts that matter most to the global economy.
24 Oct 2020
Buying bitcoin could be the best way to play the remote working boom

Buying bitcoin could be the best way to play the remote working boom

The coronavirus pandemic has accelerated the move to home working, flexible employment practices and the rise of the “digital nomad”. One of the best …
21 Oct 2020
I wish I knew what negative interest rates were, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what negative interest rates were, but I’m too embarrassed to ask

There’s been a lot of talk from the Bank of England recently about introducing “negative interest rates”. So what on earth are they, and what would th…
20 Oct 2020

Most Popular

Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
UK post-Covid recovery stocks: these 20 companies could be set to rocket
Share tips

UK post-Covid recovery stocks: these 20 companies could be set to rocket

Finding stocks with the potential to rise tenfold or even further is far easier said than done. But the pandemic has produced the most promising backd…
22 Oct 2020
Why commodities could be the best investment for 2021

Why commodities could be the best investment for 2021

There’s plenty for investors to worry about right now. But things will inevitably recover. And the sector most likely to do best when they do, says Jo…
22 Oct 2020