The global trade war is escalating fast

Donald Trump’s trade war is the biggest threat to the global economy and to world markets. Things are going to get messy, says John Stepek. Here’s what it all means.


Donald Trump: deluded or not, he means what he says
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The copper price is sliding.

Chinese stocks are sliding.

Oil tanked by 7% at one point yesterday.

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It does all rather suggest that maybe investors are really starting to worry about the burgeoning global trade war, and its impact on global growth.

And they'd be right to.

If you hadn't realised by now, Donald Trump is serious

First things first. If you didn't realise it already, then you need to get this into your head: Donald Trump is serious. He has believed for a long time in an "America First" world where the US stops playing the role of global policeman and instead looks out for itself.

As far as he's concerned, other countries have been freeloading off the US and taking advantage of its good nature and overweening sense of responsibility for way too long.

Whether you agree with this or think it is deluded, is irrelevant. He's the president. That's how he thinks. That's what his policies are aiming at.

He has also surrounded himself with advisers who agree with him. "Yes" men, you might say. That's exactly what you'd have expected given his corporate history.

So talk of trade war is not a craft feint, or a bluff, or a tactic in some 3D chess game Trump is playing. It's just what he wants.

Secondly, other countries are not keen to roll over and play nice or make concessions. National pride is one reason. Another is that they can't quite believe that the established world order is being overturned. There's a sense that "you can't do that".

He can. He is.

Given all that, then as Paul Ashworth of Capital Economics puts it, "it's hard to see how a full-blown trade war can be avoided at this stage". And that's the reality that we, as investors, have to deal with.

So what does that mean?

A full-blown trade war would be an expensive business for everyone

So far, a 25% tariff has already been imposed on $34bn worth of Chinese imports. That will be increased to $50bn soon. And earlier this week, a list of another $200bn-worth of goods was published, with plans for a 10% tariff on those within the next few months. That's pretty much half of what the US imports from China.

That's just the start. Trump is also talking about imposing tariffs on imports of cars. This "would represent a significant escalation", notes Ashworth. There are quite a few different options. The most damaging would be to impose tariffs on both finished vehicles and parts.

"A blanket 25% tariff on parts would devastate tightly integrated supply chains in North America, causing significant harm to the economies of Canada, Mexico and probably the US too."

Eventually, says Ashworth, the US might even withdraw from the World Trade Organisation (WTO). If that happens, then arguably, it would be curtains for that particular institution, because there's not much point in a world trade group that doesn't include the biggest economy in the world.

And of course, this is all before you consider the impact of retaliation.

According to Andrew Hunter, also at Capital Economics, a "full-blown global trade war could eventually reduce world GDP by 2-3%, driven mainly by a loss of efficiency from the unwinding of global supply chains".

The US would be more insulated from the impact than some countries, as exports account for a small percentage of GDP. But US multinationals which make up a huge chunk of the S&P 500 would take a "more severe" hit.

Note that not all of the current market worry is about trade wars. China appears to be serious about forcing its economy to deleverage. Every other day we're hearing about another bond default. This is a good thing it's easy to forget these days that markets and capitalism have to allow failure in order to work but it's not an easy process, particularly when it has been put off for a long time.

However, there's no doubt that the trade war is now the big threat to the global economy and to markets. This is threatening to get much messier. I discussed the implications of protectionism and Trump's agenda in a recent issue of MoneyWeek magazine subscribe here if you haven't already done so.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.