Markets have been blindsided after Donald Trump actually did what he has spent months telling everyone he would do: impose tariffs.
This is a reflection of both market sagacity and the President’s character.
Nevertheless, it still feels like the economy has entered a new era, even after Trump delayed the tariffs on Mexico at the last minute.
There’s a lot that could be said about tariffs, but there’s three points that really matter. The first is that these tariffs are much bigger than anything put into place during Trump’s first term.
The US announced a 10 per cent additional tariff on China, and 25 per cent additional tariffs on imports from Canada and, until a last-minute climbdown on Monday, Mexico.
China, Mexico and Canada account for around 40 per cent of all imported US goods, with a total value of around $1.35tn. The value of Chinese products targeted during Trump’s first presidency was $350bn.
“This is huge versus anything seen for decades with regards global trade and at face value takes us back to the protectionist period between the two world wars in terms of scale of tariffs,” Jim Reid, head of research at Deutsche Bank said.
The effects will be noticeable and will not take long to emerge. Growth in the US will be lower, while inflation will be higher. Mexico and Canada would likely suffer a recession.
The second point is that Trump was not bluffing about tariffs.
Markets had never quite taken Trump’s protectionism seriously. He was elected on the basis that he would impose tariffs, and yet the market reaction implies that this was a big surprise.
Analysts at BNP Paribas said in a note on Monday that this was always unlikely, writing: “Donald Trump’s campaign promises should be taken literally and seriously.”
This seems to be the sensible base case. Trump has repeatedly stressed his determination to put tariffs on many of America’s largest trading partners.
It is true that this forms part of a negotiation, and so they may never be imposed. But this leaves out the more fundamental question of what’s at stake in the negotiation.
In some cases, tariffs are used to substantiate reasonable demands. Many agree, for example, that Europe should spend more on defence. If this is the crucial demand vis-a-vis the EU, then it is true that a compromise could be reached in which tariffs are not imposed.
Similarly, Trump was willing to withdraw his tariffs from Mexico because they met his demands to supply more troops to the border.
However, Trump also has some more unreasonable demands, which in many cases are more important to him.
Speaking on Sunday night, he said: “The EU has really taken advantage of us….They don’t take our cars, they don’t take our farm products, they take almost nothing, and we take everything from them – millions of cars, tremendous amounts of food and farm products.”
It seems faintly ridiculous to demand that Europeans buy more American goods simply because Trump wants them to. In this case, it seems very unlikely that the EU would ever make the required concession to avoid the tariffs.
The point is that tariffs are not more or less likely to be imposed simply because they are a ‘negotiating tool’, that depends on whether Trump’s demands are ever likely to be accepted.
What the first round of tariffs has proved beyond any reasonable doubt is that Trump is willing to go hard if the targets of his ire don’t make the required concessions.
“The message sent to all trade partners is that the US is ready to take some pain…to assert its dominance, and that no one, irrespective the tightness of the relationship with the US is, can consider themselves ‘safe’ from US unilateral trade action,” Gilles Moëc, group chief economist at AXA Investment Managers, said.
Many analysts have noted that post-Brexit UK is in a relatively fortunate position when it comes to US trade, given that it buys more goods from the US than it exports.
This is true, but in the event of a global trade war its importance should not be exaggerated. Even if the UK were not targeted, it would be caught in the crossfire.
It is impossible at this stage to make any accurate prediction about the size of the hit that the global economy might face from a global trade war. But make no mistake: it would be big.
Blanket tariffs would lower global trade, reduce capital flows and create economic inefficiencies.
Back of the envelope projections from the International Monetary Fund suggest that the hit to the global economy would be the same size as the French and German economy combined.
None of this is to say that there definitely will be a global trade war, but the actual imposition of tariffs proves what has long seemed obvious: Trump is willing to upend the global trading system to get what he wants.