In the end global equity markets finished last week positively, buoyed by a strong US employment report and by hopes that a hastily convened meeting between President Trump and North Korea’s Kim Jong-un might herald a rapprochement between the two countries, putting an end to fears of a nuclear confrontation. However, this was not the story of the whole week in which markets were rattled by the threat of a global trade war after President Trump announced sweeping tariffs on steel and aluminum imports.
Taken together, the week’s events highlight the many faces of the Trump White House and the multiple risks and opportunities that may well arise from it over the rest of the year. Markets may well like the almost ‘goldilocks’ economic news, but the outcome of the North Korea summit is almost impossible to predict. The risk of a broader shift in trade policy towards protectionism is something that cannot be discounted and which could in turn threaten the continuation of steady economic growth, while also complicating the progress of any talks with North Korea.
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Although the impact of the measures announced - a 25 per cent global tariff on steel imports and 10 per cent on aluminum imports - may not in themselves amount to much, especially after some notable exemptions are allowed, it will be the secondary, tertiary and mostly unintended consequences that will determine their true effect on the US economy and the rest of the world.
It might be tempting to dismiss the imposition of steel and aluminum tariffs as a one-off that will not be repeated across other sectors, but the signs are already ominous that this will not be the case. The balance of personnel at the White House has tilted significantly towards protectionism in recent weeks, most notably with the departure of Gary Cohn as Mr Trump’s chief economic adviser, and with trade hawks such as commerce secretary Wilbur Ross and Peter Navarro now in the ascendency. The US political calendar, with mid-term elections due in November, also makes trade an issue that is likely to be exploited for maximum political advantage in the coming months, with protectionist rhetoric having played a significant part in Mr Trump’s 2016 election win.
As the Financial Times pointed out on Friday, US steel tariffs are likely to be an 'opening shot in a bigger trade war with China', with investigations also underway in Washington over whether China is violating intellectual property rights. A final report about this will probably form the basis for the US placing tariffs on a wider array of Chinese goods, while the US Treasury is also preparing its annual report on foreign exchange manipulation that could also be used to target China. This could then turn trade tensions into an outright 'race to the bottom', with currency depreciation policies being added to an ever more disruptive cocktail of threats to the stability of the international financial system.
The reactions of other countries could also make an outright trade war a more protracted risk, and with it hasten the possibility of a return to a global recession. North American Free Trade Agreement negotiations, which are already progressing slowly, could easily break down.
The EU has already prepared counter measures on €2.8 billion (Dh3.44bn)of imports from the US, even as the EU is likely to make its case for special exemptions. Asian countries were already targeted with tariffs on washing machines and solar panels in January and are also likely to seek exemptions, but 11 have also signed a new Trans Pacific Partnership, after the US withdrew from the original one last year, a move that underlines a sense of growing alarm. Against this background, nuclear talks between the US and North Korea could also face serious complications if America's regional allies are not on board over trade issues. China for sure would be likely to retaliate, with its ultimate financial retaliation being the unloading of its holdings of US Treasuries, which could force US bond yields higher and risk undermining US economic growth. The GCC has specific exposure to the tariff's first-round effects through UAE aluminum exports, but increasing dependence on global trade maintains a vulnerability to wider second-round effects as well.
Far from being ‘easy to win’, a trade war is likely to prove very difficult to reverse in the context of an already challenging and complex global environment.
Tim Fox is group chief economist and head of research at Emirates NBD