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U.S. tariffs are changing the face and future of global trade.

US leadership - but not as we know it

  • 06Mar 18
  • Jeremy Lawson Chief Economist, Standard Life Investments

President Trump’s announcement of tariffs on imported steel and aluminium represents just the latest skirmish in a US trade agenda that is heading in a more and more protectionist direction. The tangible economic impact is hard to judge: the tariffs will damage US potential growth at the margin, without having a significant impact on its trade deficit with the rest of the world.

But the symbolism is arresting. The decision by the other 11 signatories to the Trans-Pacific Partnership agreement to press on without the US - and without some of the clauses the US had included to safeguard US interests - symbolises how global trade policy leadership has changed.

It’s the symbolism that really accounts for the market reaction. Over the past 12 months, total iron and steel imports made up only 1.6% of total US goods imports and only around 0.2% of gross domestic product. However, the fallout elsewhere in the world could be more severe. For example, Germany’s DAX index was down 2.3% in the immediate aftermath of the announcement, and some listed foreign steel producing companies were down more than 5%.

A trade war is still only a small risk, but it has become a bit more likely.

What does Trump’s latest protectionist act mean for the future? Up until now markets have been fairly unresponsive to US trade policy news and actions, so we might be seeing markets effectively catching up with reality. More importantly, equities may now be factoring in a greater chance of further trade measures being enacted and the likely responses from other countries. A trade war is still only a small risk, but it has become a bit more likely following Trump’s announcement.

The bigger concern over the long term is rising tensions between the US and China. Both countries have already engaged in tit-for-tat tariffs and trade investigations. So far the interventions have been targeted but the chances of them escalating have certainly risen. Not all of the Trump administration’s actions have been out of step with those of Bush and Obama. But the self-initiated World Trade Organisation cases, the blocked deal between AT&T and Huawei, the section 301 investigations into Chinese trade practices, and higher barriers to Chinese foreign direct investment are serious.

This is compounded by the US president’s general approach to China, which is different to his predecessor. He’s rebuffed Chinese efforts to avoid tensions, including offers of market opening and increased imports, and has declared China a “threat”, guilty of economic aggression. Trump’s latest trade agenda signals his intent to pressure China. There have been reports that trade hawk Peter Navarro is to be promoted to a more powerful role within the Trump administration. This, coupled with administration statements that it intends to significantly alter the economic relationship with China, point to further barriers to trade and investment between the two countries. None of this is good news for a world whose fortunes revolve around its two largest economies and superpowers.

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