Markets made it pretty clear what they thought of Donald Trump’s plans for a new 10% import tariff on aluminium and a corresponding 25% tariff on steel.
In the immediate hours after Trump took to the airwaves, the Nikkei fell by 2.4%, the Hang Seng dropped 1.6%, and the ASX slipped 1%. The FTSE dropped more than 100 points to a Friday mid-morning position of just over 7,100.
And the Dow itself closed down 420 points.
What’s interesting though is that overall these markets are all trading at very high levels, whichever currency they are priced in.
Sterling has been the weakest of currencies following the Brexit vote so it’s perhaps not surprising that assets on the FTSE are bid up, but the Hang Seng is currently trading at close to a ten-year high, the nikkei’s just coming off a 15-year high, and the Dow Jones is just now topping out of a 30-year high.
There are two ways to look at this.
The first is that on the whole, although there was some selling on the day, markets are not that spooked by the prospect of Donald Trump’s move to impose tariffs. Sure, there’ll be an inflationary impact domestically in the US, as higher steel and aluminium prices get passed on to consumers.
But the global economy is on a tear and Chinese imports to the US only amount to 2% of the total. As a whole, this won’t hurt China too much, but as a net benefit will play extremely well with a key demographic for Donald Trump, blue collar workers.
The second view is much more gloomy.
Take this for starters from Berenberg, from analysts based out of Boston.
“Imposition of these tariffs is bad economic policy and its timing is inopportune,” stated Berenberg commentary shortly after the announcement was made.
If that appears to be unequivocal, Berenberg then hedges its bets somewhat by pointing out that when one runs the numbers the total amounts being talked about in these tariffs only run to the low billions. In the context of the USA’s total imports of US$2.4tn, it’s small beer.
But Berenberg also adds that if global confidence in free trade starts to take a hit, the negative knock-on effects could be “material.”
So far, so cautious.
Other commentators invoked a more economically apocalyptic tone by harking back to the Smoot-Hawley tariffs of the 1930, which started out well, but which ended up sparking the damaging trade war that helped draw the world into open conflict in 1937 (China and Japan), 1939 (France, Britain, Germany and Italy) and 1941.
The flaw in that argument is that these new tariffs are not coming at a time of global economic meltdown, rather the opposite.
In that sense, Trump has the edge.
But even so, it could still escalate. Chinese dumping of steel has been an issue before the World Trade Organisation more than once.
But it’s noticeable that as long as the US has been the best at free trade, it’s been in favour of tariff-free trading networks.
But for the first time since it became the world’s largest economy in the 1870s, the US now has a real long-term competitor, and not one it can slap down too easily.
Obama’s TTIP would have been a good first start at containing the Chinese threat to US dominance, but it was dead on the floor of Congress before Trump even took his oath of office.
As the British found out a century ago you can squeal and make policy all you like, but when you’re on your way out there’s not much you can do to change matters.
The US still has plenty of tricks up its sleeve yet, but notice what’s happening. Walls and barriers are shooting up: Mexico’s getting a physical one, markets are getting financial ones. All of a sudden the US is on the defensive, and for all of Donald Trump’s tough talk, what’s actually on display here is weakness.
So with markets around the world at long-term highs just as the global economic structure starts to morph, is it time to sell?
Not yet, say traders. But let’s hope they don’t all change their minds at once.