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Mexico and Canada have been given a last-minute reprieve from Donald Trump’s tariffs. China has offered only the most half-hearted response to them. At this rate, even the European Union may be off the hook. Equity markets have rallied strongly as the trade war which seems about to crash the global economy appears to have been averted. But has it really? Investors are kidding themselves if they think the crisis is over.
Trump is clearly a leader who likes to get his own way
In the end, it turned out not to be a re-run of the Great Depression, at least not for now. After President Trump slapped punishing 25 percent tariffs on both Canada and Mexico, along with 10 percent on everything China sells to the United States, it looked as if the global trading system was about to be ripped up. A trade war would sever supply chains, push up inflation and destroy whole industries. But after phone calls with Canada’s Justin Trudeau and Mexico’s Claudia Sheinbaum, Trump struck a deal and the tariffs were postponed by a month. Likewise, far from ordering all the container ships crossing the Pacific to turn around, China’s President Xi imposed only minor tariffs on American goods coming into his country.
The crisis is over, right? Investors certainly seem to think so, with Asian stocks rallying strongly overnight, and Wall Street expected to follow that lead later today. The trouble is, this seems like an overreaction. Sure, it is good that immediate tariffs have been averted. They are, in effect, a tax on consumers in the country that imposes them, and all they do is make the global economy less efficient.
But here’s the problem: Trump now has a taste for “tariff diplomacy.” Trudeau conceded to appointing a “fentanyl czar” and a intelligence directive worth the equivalent of $140 million to fight organized crime and the fentanyl trade, addressing two of the major beefs Trump had with his northern neighbor. Mexico’s Claudia Sheinbaum pledged tighter border controls, with an emphasis on tackling drug trafficking. Trump will have learnt his lesson: throw some weight around and you can extract concessions.
Putting aside the issue of whether he is right or wrong, Trump is clearly a leader who likes to get his own way, and enjoys using force to make a negotiation conclude in his favor. After the first skirmish proved successful, it is going to happen again and again. The Germans will be forced to buy Chryslers and Mustangs, the French to drink bourbon, the Chinese to welcome Amazon and Google into their market, and the British to eat chlorinated chicken. Investors are celebrating too early. The global trade system is on track to constantly be disrupted by one demand after another, tense stand-offs and last-minute deals. Over time that will be almost as bad as an all-out trade war.
