– Global stocks slump as Trump risks trade wars
– Gold prices little changed despite dollar weakness after tariff news
– Trump announced plans to impose heavy tariffs on imported metals
– China likely to retaliate with heavy tariffs on U.S. agricultural exports
– Geo-political tensions with EU and of course China and Russia to escalate
– Trade, currency wars and competitive currency devaluations tend to lead to actual war
– Russia unveils next generation of “invincible nuclear weapons”
– Safe haven gold bullion a hedge against protectionism and economic war
Editor Mark O’Byrne
Fears of a global trade and economic war swept across markets yesterday and this morning as President Trump announced very high tariffs on foreign steel and aluminium. In response U.S., Asian and European stocks has slumped, the dollar weakened and gold prices were flat prior to eking out small gains.
The response drew global condemnation but Trump, showing a wonderful grasp and understanding of economic history, pushed back against a wave of criticism against the hefty steel on imported base metals, with an ignorant tweet saying “trade wars are good and easy to win.”
Trump is facing anger from manufacturers and trade partners in Germany, most EU countries and of course China after announcing tariffs as high as 25% on imported steel and 10% on aluminum for “a long period of time.” The formal order is expected to be signed by Trump next week.
Anyone with even a rudimentary knowledge and understanding of history knows that protectionism and trade wars tend be badly impact economies and can lead to recessions, depressions and indeed war.
China is likely to be most affected by the move, sparking concerns that retaliations could come in the form of trade and currency wars. This is particularly a concern from the likes of Russia and China who have been quietly resisting, what they see as a U.S. drive for global domination, as an increasingly united force, for some time now.
Reverberations and reactions came from across the globe, from as far as Australia where The Australian Industry Group warned that the move may trigger retaliation and a spread of protectionist policies around the globe.
“It’s a really bad idea…it can get pretty dark pretty quickly”
The general consensus by market and trade experts is that this is a wrong-move by the Trump administration, who are once again sticking to emotive campaign promises to American workers and corporations rather than the welfare of the wider U.S. economy and the now closely integrated global economy.
“It’s a really bad idea – how bad depends on what the the rest of the world does in response,” said Mark Zandi, chief economist at Moody’s Analytics Inc, to Bloomberg.
Zandi went on to tell Bloomberg that whilst the US tariffs alone may have only minimal impact on growth and inflation in the US:
“I can’t imagine the rest of the world is going to stand still for very long. The scenarios you can construct can get pretty dark pretty quickly.”
How can a tariff lead to ‘dark’ times? Quite simply through retaliation and unforeseen consequences on the part of the Trump administration.
The EU has already expressed disgust at the move whilst the United States’ own William Dudley warned yesterday of increased pressure on prices and jobs.
Retaliation from EU, China and anywhere else you can think of
Yesterday the EC’s Head Jean-Claude Juncker promised that the Commission would ‘react firmly’ with ‘countermeasures’ to these moves announced by President Trump.
“We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk.”
Reports state that Trump was advised to exclude allies from the tariff but this was ignored. Juncker picked up on this and referred to the EU’s history as a security ally of the United States, expressing his fury at the impact this new move would have on the wider global economy.
Meanwhile in China, officials were warming up to respond with their own tariffs that will impact the country. These measures by the US said Wen Xianjun, vice chairman of the China Nonferrous Metals Industry Association “overturn the international trade order…Other countries, including China, will [also] take relevant retaliatory measures.”
Many expect China to retaliate with its own tariffs on agricultural goods, namely sorghum of which China is the biggest importer of US produce. This could hurt the US but Trump even more:
The US now sends China about US$1billon a year worth of sorghum, the grain used to make gut-busting baiju alcohol. And in the US, much of the sorghum comes from places like Texas, Kansas and Oklahoma – all states handily won by Trump in the 2016 election. It’s almost as if the Chinese leadership keeps a 2016 electoral college map pinned to the wall in Zhongnanhai. Source SCMP
Inflation and interest rate increases
Good news for gold owners is that tariffs such as these will likely lead to an uptick in inflation. But, surely this will increase interest rates? You might argue. Perhaps. But given gold’s response so far to increased rates from the Federal Reserve, it seems like it is unlikely to respond negatively to tightening in monetary policy.
“Raising trade barriers would risk setting off a trade war, which could damage economic growth prospects around the world,” New York Fed President William Dudley said in Brazil on Thursday. “If tariffs go up, it will, at the margin, tend to put more upward pressure on prices, and those upward pressure on prices will have to be considered by the monetary authority.”
Tariff-lead inflation may add to the stagflation pressures that we are already seeing in many western economies – especially the UK. Inflation has been in stealth mode in the US or the rest of the world. Slowly but surely and imperceptibly, people are seeing a reduction in their spending power and increase in living costs. This may become more obvious in the coming months.
This latest move by Trump may not instantly feed through to every-day Americans but it is likely to cost jobs and increase prices after some time-lag.
The impact on jobs and the subsequent reaction is one we should be wary of. Back in the 1970s a rolling belt of shocks and crises (as we see today) signalled the end of a major boom period. In response more government intervention was triggered across the West. New regulations for both the labour and capital markets were introduced, stifling innovation and global trade.
Trade war today, shooting or cyber war tomorrow?
History repeats itself and it looks like we’re going into full repeat mode on