Trade Wars and its Impact on Markets

Trade Wars are good and easy to win. This Tweet by the US President Donald Trump on March 2, 2018 was the precursor of a major trade war which has engulfed the entire world. What started out as an attack on China and the trade imbalance between the two superpowers has now escalated into a trade war with Trump (as usual) on one side and European Union, Canada, Mexico and China on the other. Trump has not only infuriated the Chinese with his tariffs on steel and aluminum but has also managed to antagonize historical American allies – Europe and Canada.

The G7 Showdown

The Europe and Canadian trade war came to a boil in a G7 meeting in Canada when Trump backed out of a joint communiqué after leaving the summit. This was followed by an outburst where he slammed Canadian Prime Minister Trudeau and described him as meek, mild, dishonest and weak. And now emboldened by his success in Singapore, he is doubling down on trade wars with his latest tweet:

“Based on the Tariffs and Trade Barriers long placed on the U.S. & its great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the U.S. Build them here!”

This leaves Germany, the world’s largest car exporter by a mile, (with over $150 billion of exports in 2016 as compared to Japan’s $90 billion and United States $53 Billion in 2016) in a very precarious situation both economically and politically. How Europe in general and Germany in particular react to Trump’s latest Twitter missile will be extremely important for the global markets.

The Aftermath

All car makers – BMW, Volkswagen, Fiat, Daimler, GM and Ford fell on the news. This was to be expected. What is surprising (to some) is that US Dollar is strengthening on back of such developments. It is already at a 7 month high and with US Fed remaining hawkish in the short term; the greenback is expected to remain strong in the short to medium term. There is another school of thought, which believes that imports would become costlier due to the tariff war leading to inflation and subsequently forcing Fed into increasing the interest rates. This should lead to automatically further strengthening of the Dollar. Another idea floating is that US exports will be hit reciprocally and there will be a global slowdown in growth, which would again make US Dollar the automatic safe haven for investors. Whatever you might say of Trump, it looks like he has it covered from all sides.

The But?

With Mid term elections fast approaching in United States, it is expected that this rhetoric would soon fall out of favor as major Republican allies especially the powerful Koch Brothers are extremely against tariffs and a trade war. Experts believe that Trump will soon move on to his next obsession and the backroom politics will prevail upon the Trump administration to see reason. Many investing experts also believe that the talk of Trade war is just that – talk. Trump likes to challenge the status quo and this is his way of shaking things up. The investor needs to be both extremely patient and extremely careful, as there is possibility of strong volatility in the market due to the uncertainties present in the coming weeks.