- Market Commentary
- By Jack Ablin
- July 18, 2018
The longer-term implications of the current US trade stance
The trade war with China is gaining momentum and investors have been flapping their arms with uncertainty. Thankfully, a shiny object – earnings – is distracting them for now. A protracted trade war would have profound implications on the global economy and the investment landscape. Tariffs tend to raise prices by increasing costs and to crimp productivity as trade impediments distort the global supply chain; inflation robs paychecks while declining productivity saps profits.
Protectionism resonates with Americans: 66 per cent of those surveyed in February by Morning Consult believe it was important that Donald Trump shrink the trade deficit with China. President Trump took office on a protectionist platform and is simply following through on a campaign promise. The problem is, economics is double-entry accounting and policy actions always have ramifications. While policymakers may understand the blowback, they know their constituents don’t . . . and so they proceed as if having that extra piece of cake will not make you fat, so to speak.
Investors and business leaders are scrambling to assess the implications of a protracted trade dispute. The global supply chain has been built and optimized over the last 35 years; dismantling it quickly would be disruptive. Thanks to the “just in time” exchange of intermediate goods, a fire at a manufacturing plant in Japan creates supply shortages in the United States.
President Trump needs to communicate his trade strategy to the American people. The strategy is his alone; even his trade advisors are divided in their views. We believe his approach to trade is politically driven rather than policy driven, given the Commander-in-Chief’s attention span and his desire for measurable wins. Political strategies tend to be short term in nature, designed for quick wins. Policy-driven strategies have a longer timeframe designed to reset a global imbalance or gain strategic advantage.
A protracted trade dispute would expose the American people to economic and investment market blowback. It would take strong political will to sustain the consequences of reduced real wages and shrinking profits likely coupled with an economic recession and a stock market pullback. In our view, neither the administration nor the Republican leadership has the stomach to endure such self-inflicted wounds and see this policy through. For now, we’re inclined to look past the valley.