In yet another of the President of the United States’ ill-informed, spontaneous tweets, sent at the beginning of March when he promised to impose a 25 per cent tariff on American imports of steel and 10 per cent on aluminium, he claimed that “trade wars are good, and easy to win”.
We know by now that Trump is impervious to knowledge, information and good counsel, and will tweet and do whatever pops up in his narcissist, irrational mind. We could therefore view his latest rant as irrelevant – a mere campaigning ruse for the POTUS elections 2020, an unfortunate one-off, or a mishap as inevitable as bad weather. Yet retail investors like us do so at our own peril. Stock markets are already jittery, and it is far from certain how many more ill-judged one-offs they will take in their stride until nervousness triggers a panicky stampede for the exit.
It is difficult to analyse Trump’s muddled thinking and that of his permanently changing and shrinking administration. What has emerged over the past two years seems to be his belief that chronic trade deficits are bad for America, that they are bad for employment, that the US always gets the short end of the stick, while in fact it could show the world its fire and fury, unbound by international agreements it had signed up to in the past; and that others will turn the other cheek in awe.
This demands some explaining. A trade deficit is in essence a situation where one party provides more goods than it receives in return. In a transaction involving two parties alone, such a situation is far from unusual. We regularly buy our steaks at the butcher’s without ever supplying meat to him, and we fill up our cars at the fuel station not worried that we will never deliver petrol in exchange. We pay, and that’s it.
The US too has so far never failed to pay for its imports. This is why bilateral trade deficits do not matter, as the butcher will never complain about getting no meat in return. In a global context, a trade deficit with the rest of the world implies that the US has received more stuff from every other country on earth than it has given back.
For four decades, Americans have consumed more than they produced and paid for it with bonds that all counterparties have gobbled up with gusto. It is a Goldilocks scenario only someone as economically illiterate as Trump could complain about. No one in her right mind would refuse an arrangement were generation after generation can live happily by just signing IOUs everyone else will treasure more than goods.
A veritable trade war seems under way, which of course nobody will ever win... investors like you and I should diligently prepare for the worst
What Trump and his acolytes had in mind was saving the jobs of 140,000 workers in the steel industry and those of 160,000 hard hats in the aluminium industry, seen by many of Trump’s voters as the symbol of the good old days of America. Not incidentally, they also form the constituency of US Vice President Mike Pence.
What makes this campaign ruse so outright silly is the fact that it was not a lack of pricing power that abolished nearly 80 per cent of the jobs in those sectors over the past four decades. Automation and improved productivity have claimed vastly more jobs in recent history than lowered output – in the steel industry as everywhere else for that matter.
This is not bad altogether. No one in her right mind would demand that roads should be built by hand rather than using machinery, for instance. Old jobs die and new ones pop up. Even if all jobs in the steel industry were to be lost in the near future, this pales in comparison to million jobs added in the US in 2017.
What makes such posturing so harmful for US citizens is the fact that many more employees are labouring in jobs using steel than in jobs producing it – nearly six times as many. They will be harmed, as well as US consumers who will have to pay the difference for the now more expensive final products.
Our portfolio of shares in the US and in the rest of the world will need adjustment. It is easy to understand that US steel consuming industries will be the first to suffer, other than healthcare or banking businesses, for which steel is of insignificant importance.
This is why Carl Icahn, a close friend and confidante of Trump, was quick to sell his investment in a Wisconsin crane manufacturer – a few days before the tariff announcements (nobody is outraged anymore).
Last Thursday, US trade representative Robert Lighthizer told a Senate panel that Trump had decided to “pause” the import duties on the EU, Argentina, Brazil, Canada, Mexico and South Korea (all close US allies one would think) but to impose $50 billion in tariffs on Chinese goods and limit the country’s investment activity in the US as payback for what Trump alleges is years of unfair intellectual property theft. China said it is ready to retaliate with “necessary measures”.
Before the exemption of the EU and the six other countries was announced, EU chief Jean-Claude Juncker, outlining the first EU response to Trump’s new import duties, had said “We can also do stupid”. The EU list of reciprocal punishment was to include motorcycle producer Harley Davidson, Kentucky bourbon and US cranberries.
Originally, the Donald and his crazy chums Lighthizer, and Peter Navarro, presidential trade adviser, had already hinted at plans to punish European car producers, whose exports to the US are to the tune of $38 billion (2016). That would have made our investments in the European car industry look wobbly. The next step could have seen the EU focusing on American IT giants like Alphabet, Amazon and Apple, already in discredit for their tax antics.
God knows what the US administration has up in their sleeve in a further step of escalation against China, perceived to be their most menacing rival by the President’s outfit (‘Death by China’ is the title of Navarro’s standard work), or against any country trying to hold the US to account at WTO courts.
A veritable trade war seems under way, which of course nobody will ever win. Trade has lifted hundreds of millions of people out of poverty in the past 20 years, has formed complicated supply chains and created consumer choices unheard of for our parent generation. Curtailing trade will harm all of us and limit the scope of any country to eradicate poverty and to alleviate inequality.
To hope that Trump’s war will end with a whimper is legitimate. Yet investors like you and I should diligently prepare for the worst.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.