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Trump’s trade wars becoming reality threaten to topple goldilocks economy

25. January 2018, 13:18 Uhr

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After he had promised to tear up NAFTA and end China’s allegedly taking undue advantage of the US economy, over the course of the last year many observers had come to think Donald Trump’s threats to be cheap talk for the lack of action. Building a wall on the Mexican border? Not much of any concrete in sight. Dismembering NAFTA? Lawmakers from trade-dependent states as much as lobbyists, such as the Chamber of Commerce, have demonstrated the dire results of such a policy to the President, evidently with some success. Cornering China? The Donald launched all but a charm offensive towards Beijing when he took part in the APEC conference late last year. But now, the President has made good on his words in a sudden strike. Not only against China, but also the US ally South Korea his administration lashed tariffs on washing machines and solar panels in what appears to be only the beginning of a veritable trade war.

This has hit markets and investors on the wrong foot. The consensus reckoned that, apart from the odd skirmish, there would be not much of a distraction from the current economic goldilocks environment businesses and traders have grown accustomed to. Now, South Korea already has announced reciprocal measures, with China certain to follow. Yet even more frightening is a scenario where Beijing might opt to use its gargantuan holdings in US treasuries as a weapon in an all-out trade war. Markets promptly choked when news broke early this month that China might stop its treasury buying or even begin reducing its stockpile. In such a scenario, yields of the benchmark 10-year treasury would easily jump to three per cent and beyond without any inflation whatsoever on the horizon, and thus triggering another driver of a great, disruptive rebalancing in the world’s capital markets, potentially upheaving the real economy in their wake (see next issue of our monthly bulletin). But even without this particularly dire scenario taking hold, a US fighting trade wars with an array of Asian countries suffices to throw a spanner in the trade works of the world economy which are not exactly in overdrive, anyway. Trading entrepots such as Singapore would suffer, depending on the free flow of goods; but the recent darlings of investors, emerging markets would be hit most. Many of them depend on free markets for their nascent export industries to thrive; if access becomes shut down, many of them would tumble into severe trouble with debt levels at record highs and current accounts deteriorating.

There is still hope that Donald Trump simply wants to demonstrate his determination to bring Chinese counterparts to the negotiation table. Alas, we come to a different conclusion. The President faces mid-term elections in November, with his Republican party on Capitol Hill in real danger to lose one or, if it comes to the pinch, both chambers of Congress. If he does not fulfil his central campaign pledge to protect American jobs, voters’ wrath will hit the Grand Old Party like a steamroller. Hence, expect the Donald to proceed from this opening shots to full battle over the course of the year – with much losses and collateral damage to ensue.