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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.