27 September 2020
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There may be method to his madness.

Is Trump's 'trade war' careful economic planning?

David Bassanese
3 April 2018

It’s just as well that United States President Donald Trump is creating mayhem for markets with his erratic Twitter outbursts and threats to the world trading system.

After all, this is preventing global equities from simply 'melting up' in what would otherwise be a purple patch for the world economy, given synchronised global growth, strong corporate earnings and still low inflation and interest rates.

Trump is providing pit stops for still doubting investors to get on board before the bull market roars ahead for another lap.

Of course, I’m being slightly flippant – but the fact is that were it not for the Trump tirades, global markets would still be looking for another excuse to pause for breath after a furious rally over the past year.

Indeed, for a brief moment in January, in light of the Trump tax cuts passing Congress, it appeared everyone was suddenly bullish and we were finally entering into a potentially dangerous 'melt up' scenario for stocks.

That eventually ended when we did get one (non-Trump) related macro scare two months ago –a surge in US wages growth in the January payrolls report.  

But the February report suggested that was just a rogue number and US wages remained fairly benign.  We’ll get an update on US wages for March this Friday, but I reckon they’re likely to remain contained due to reduced worker bargaining power caused by globalisation and technology. 

That brings us to Trump. Just when it seemed stocks would regain their mojo, the world’s most important person saw fit to escalate trade tensions through tariffs on steel and Chinese imports.

It begs the question: is Trump truly crazy enough to think he could win a protracted trade war (which he can’t), or is his merely part of a negotiating strategy to effect change his way – or at least be seen to be effecting change amongst his rust-belt support base?  

In a sense, Trump is right to target China – it’s been dumping its persistent steel glut on global markets for years, which has indirectly lowered global prices and hurt US producers. And American patents, brands and trademarks are routinely copied by Chinese producers in flagrant disregard for world trade rules. 

As have other Presidents, Trump could have ignored this – out of fear of upsetting China. Or he could have quietly sought legal redress through the World Trade Organisation – which might take years and achieve very little.

That’s not his style.  Irrespective of whether his concerns are sincerely held or merely political grandstanding, the WTO route could not achieve his aims.

But unless he is completely unhinged, he must also know a protracted dispute with China could sink stocks and the economy – and do more damage than good for him politically.

That’s why I suspect that – as we’ve seen with North Korea of late – he’ll soon try to open a dialogue with China on trade issues and attempt to claim at least some type of victory. 

As for this hardline advisers, they could be merely part of his attempt to make his threats appeal real.  

In short, to believe Trump will risk derailing the bull market and America’s glorious economic expansion with an escalating trade war (for marginal long-term economic benefit) is to believe he is truly irrational. That’s possible, but certainly counter to his career so far. We can fault his methods, but let’s not forget he is a billionaire and did win the US Presidency having never held political office in his life.

Assuming Trump’s not crazy, then it must be the case that this latest threat to the bull market will also soon pass.  That would then leave US inflationary pressure as the greatest lingering risk to the bull market – but a risk which I also don’t think will flash red until at least mid/late 2019 at the earliest.


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