Vanity Fair’s Bess Levin recently said that when it comes to the trade war hoopla the “Three Horsemen of the Economic Apocalypse are on it”. The article in question, tinged with an anti-Trump bias, is an interesting read in that it highlights the seemingly disjointed approach Trump’s team has taken when talking about tariffs. Given this weeks shocks and surprises, the question begs: is there a method to the apparent U.S. policy madness?
A Week of Drama
After the S&P 500 closed below its 200-DMA on Monday Trump pinpointed which products he might put tariffs on, China offered a very detailed list of potential tariffs, and the regular U.S. posse said/insinuated that everything will be fine as a negotiated settlement was the likely outcome. At some point during the week the financial markets started to conclude that the trade war hype was overdone and prices rebounded with authority. Then, seemingly contradicting the pledge for more focused negotiations rather than an actual trade war, Trump unleashed the following late yesterday:
“Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers. In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under section 301 and, if so, to identify the products upon which to impose such tariffs…” CNBC
Not surprisingly, immediately following this news the futures markets collapsed. Given the tit-for-tat dynamic in place it should only be a matter of hours before China responds, and then it will really, really be time for intense negotiations to take root…or so “the horsemen” should be telling us sometime today.
The Method
It is easy to get enthralled by the rhetoric, hyperbole, and political biases, and treat today’s “trade war” as a source of entertainment. After all, life long tariff hater, Larry Kudlow, is now on board extolling the virtues of threatening tariffs. It also easy to forget, as most news sources did yesterday, that despite the volatility the S&P 500 closed up on the week and some progress has been made in the U.S.’s pursuit to stifle China’s tech quest. On the latter point, consider the following from September last year:
US tries to enlist EU and Japan in China tech fight ~ FT. September 21, 2017
Back in September, after months of U.S. pressure, the EU and Japan were “wary” about joining the fight against China because they saw “risk in co-operating with a bellicose and mercurial US president”. Flash forward to yesterday:
“The European Union and Japan have asked to join the Trump administration’s World Trade Organization case over China’s alleged discriminatory technology licensing.” Bloomberg
The formation of a “coalition of willing” (yes, this was from Kudlow) is a potentially positive development for Trump.
In short, while perhaps not the world’s most guileful tactician, I don’t think Trump is stumbling around in the dark trying to get China to do what he wants. Rather, there are legitimate concerns raised by the Trump administration against China’s unfair trade policies. The current U.S. scheme is to endlessly threaten fire and brimstone while at the same time quietly praying for favorable negotiations.
The Madness
As the trade war drums grow louder, it goes without saying that it would indeed be an ‘economic apocalypse’ if the U.S. and China really become entrenched in a tariff-centric battle, and the only thing worth owning in such a scenario would be precious metals. It is this flirting with madness – the proverbial fun and the games that presage the loss of an eye – that fascinates us all.
“As the Chinese saying goes, it is only polite to reciprocate”. Reuters