You would have thought President Donald Trump might have left well enough alone. His tax package was passed – a huge political victory – and the economic figures have been strong.
But whatever the motivations – hubris, the mid-term elections later this year or maybe just a belief that he is on a roll – Trump has chosen to up the ante again. Tariffs on Chinese imports, the latest batch just announced in what is the most aggressive trade move against China in recent years, threaten a tit-for-tat trade war. On Wednesday morning China, as expected, reacted with its own list of US goods on which it plans to impose tariffs.
Meanwhile the president's decision to target Amazon in a series of tweets – which continued on Tuesday – has added to the nervousness around the tech sector, already suffering from fallout in the Facebook controversy.
I am right about Amazon costing the United States Post Office massive amounts of money for being their Delivery Boy. Amazon should pay these costs (plus) and not have them bourne by the American Taxpayer. Many billions of dollars. P.O. leaders don’t have a clue (or do they?)!
— Donald J. Trump (@realDonaldTrump) April 3, 2018
Stock markets responded predictably, taking a nasty dip on Monday. And while trading was better on Tuesday and Spotify launched successfully on the market, there is a nervous week to come. More trade measures against China were announced after markets closed late on Tuesday and look likely to set off another bout of market nerves.
The question investors will be asking is whether there is now time to negotiate a way back from a damaging trade war. The tariffs announced so far will damage certain sectors, rather than have an overall direct impact on international growth. But the stepping up of tensions will worry investors.Looking to the months ahead, the signs are that the extraordinarily calm and positive trend in the markets since Trump got elected are coming to an end. Volatility is back.
When Trump got elected, there were fears of market turmoil. Since he took office, precisely the opposite has happened. Trump tweeted 60 times between January 2017 and January 2018, on the general theme about how wonderfully the market was doing and how this showed his policies were making America great again.
For the first year of Trump’s presidency, everything on the economic front seemed to be going well, both in the US and internationally. It meant the president’s eccentricities, and the risks of his approach to trade in particular, were more or less ignored on Wall Street. His tweets became a sideshow.
Pork and wine
Now, however, the honeymoon may be ending. Sabre-rattling on trade has now turned to reality. Following Trump’s recent decision to impose tariffs on steel and aluminium imports, using a national security law seldom deployed in the trade arena. China retaliated at the weekend, listing $3 billion of US imports on which it would impose tariffs, including high-profile products such as pork and wine.
Then,late on Tuesday, the US announced further tariffs following a separate investigation into the alleged theft by China of intellectual property, relating to demands it puts on companies who invest in China to reveal details of their technology. These will hit Chinese consumer products and manufactured exports valued at $50 billion annually with tariffs of 25 per cent. It is an aggressive play by the President, even if the tariffs will not come into force for some weeks, perhaps leaving space for a presidential pullback.
China, in turn, will react again, with speculation surrounding tariffs on the valuable soybean exports from the US, some 60 per cent of which go to the Chinese market. A Chinese spokes,an said: “As the Chinese saying goes, it is only polite to reciprocate.”
This is how trade wars start, though we will have to see how events play out. Some negotiated solution may emerge with China with talks already underway between the two sides on trade issues – though it will surely now take time. And remember that while other countries like the EU, Canada and Mexico may get an initial waiver from the steel and aluminium tariffs, the US has said this is subject to further negotiations.
The risks of a damaging escalation here are obvious. In the short term, there could be some benefits to other countries from the US/China tensions. Irish pig producers will be among those hoping to benefit from greater Chinese business, as well as Australian wine merchants. But despite these silver linings, the dangers from an outbreak of wider international trade tensions are much greater for a small exporting country like Ireland than will be any sectoral opportunities.
Add this to the fallout from the Facebook saga and the overhang of possible greater regulation on the technology rock stars of the equity market and you have two significant specific concerns.
Firing line
And Trump has entered the tech arena too, tweeting about Amazon, which he accused of paying little or no tax, and of using the US postal system “as their delivery boy” and “putting many thousands of retailers out of business”.
Stand back for a moment from the argument here and consider a US president using his office to attack an American company – and the uncertainty this creates about who could be next in the firing line.
Paul Donovan, global chief economist at UBS Wealth Management, said in a tweet yesterday: "Random tweets by a head of state against a company do not directly change the economic outlook. They may undermine the certainty and idea of rule of law which fosters innovation and promotes investment." His point was that, by acting outside the normal legal or administrative process, the president – if he persists in this tactic – is introducing a new uncertainty into business life.
For his first year in office, everything in the economy was in Trump’s favour. Now, however, there are wider concerns about rising US interest rates and the high valuation the market has reached, even if many still argue that the underlying economy remains solid. Now trade worries are added to this mix.
Investors are edgy and aren’t sure whether market trading is just returning to more normal ups and downs, or whether more falls are imminent. Against this backdrop, they will no longer take Trump’s twitter feed as background noise. Given his record so far, this promises a bumpy ride.
