Equity markets are down since the start of the month; European stocks are down 7.16%, the UK equity index is down 7.17% while the US main benchmark index is down 3.27%. Shares continue to come under pressure as fears relating to inflation and US Federal Reserve rate hikes continued to build on the back of the Fed’s Chair Powell’s Congressional testimony. However, President Trump’s announcement of tariffs on US imports of steel and aluminium did nothing to help and may become a game changer if matters escalate.

With US inflation and Fed expectations still moving higher, Trump has added to the inflationary bias in the US with tariff hikes. As a consequence share markets are likely to remain volatile in the short term with a high risk of seeing new bottoms being tested.

Trump’s intention to impose a 10% tariff on imported aluminium and 25% on steel does not make sense economically, shows bad timing and adds to the risk of a trade war. Tariffs in the past have rarely produced positive results. Heavy tariffs in the 1920’s led to a trade war, the Great Depression and 2 world wars. A review of tariffs imposed by the Bush administration concluded the cost far outweighed the benefits.

Timing is an important consideration. Any basic economics student understands that increasing government spending may result in an increase in imports if the economy is already at peak output. But Trump doesn’t seem to understand that one reason that America has a trade deficit is because it spends more than it earns each year. His tax policy will probably lead to huge deficits and add to the current trade imbalance.

The US economy and labour market are hot already, they certainly did not need a boost, and furthermore, protection. This will only add to production costs and inflation in the US and further increase the pressure on the Fed. And it runs the risk of stoking a trade war as other countries retaliate, which is obviously bad for world trade and global growth.

The risk of a global trade war, in which the US measures force others to impose tariffs, following which the US is forced to respond with more tariffs and so on, has gone up. This is the highest risk to European growth and European equity markets.

This threat has increased with Gary Cohn’s resignation. Gary Cohn, until yesterday Donald Trump’s top economic advisor, has resigned after a confrontation with the president over the tariff plan. The departure may cause further turbulence since he was the main counterbalance in an otherwise protectionist administration.

Then there is China. Till now China has been extremely measured in its approach. But the US is also threatening China on the intellectual property front which the latter might not take lightly. China is likely to want to enhance its image as the new champion of global trade, and Trump is making it very easy for this to happen.

In the meantime Europe has vowed to retaliate. But Europe has a host of seasoned negotiators who understand the implications of a trade war well. I would not be surprised if Europe is already a few moves ahead of the US and is directing the initial shot shots of the war.

As a final thought, there is only one certainty that will result from a trade war; there will be no winners, just losers and bigger losers.

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.