What's happened and what's coming in the trade war
If you're a trader, then you have undoubtably come across at least one headline or article talking about the trade tariffs. If you are unfamiliar with the geopolitical storm this has created, here's a little rundown:
- The Trump administration announced its intention to impose 25% tariffs on steel and 10% on aluminum that is imported to the U.S.
- he Business Roundtable, a lobbyist group that has supported Trump until now, criticizes the move to impose tariffs and warns that it will damage the global economy. They also noted the danger of these measures causing an escalation and full-out trade war.
- China officially states that it will take all necessary measures in response to the tariffs.
- Nasdaq, Dow, S&P all see drops in the region of 1% after the official announcement of the measures. U.S. Steel, on the other hand, sees a 6% gain.
- Many longtime U.S. allies - Canada, Mexico and the EU - promised swift and severe retaliation to the tariffs being levied against them.
- U.S. farmers unsure of the duration of the tariff spat, are already losing money on future crops.
- After this tit-for-tat with the EU, Trump threatens tariffs on European cars.
- Harley-Davidson announces moving production for motorcycles intended for the European market outside the U.S. as a way to avoid EU tariffs targeting the steel steads. Trump reacts by berating the company and its executives.
- Exceptions have been speculated, but White House advisors officially stated no exceptions will be given.
Hitting the heartland
Much like his rhetoric, Trump's tariffs were like a shot from a scattergun. China's tariffs, on the other hand, were composed and precisely targeted: pork and soybean (and electric vehicles) in the crosshairs.
Just the soybeans China imports account for about half of all the crop that is exported from the U.S. The tariff proposed for pork is a substantial 25% - adding a quarter of its value to the cost of the meat. China also happens to be the third largest global importer of U.S. pork - so a drop in demand for U.S. pork in such a large market will hit pig farmers hard.
Companies with many assets will generally be able to weather the trade war - the people who won't are small and medium farms. A drop in demand could cause the price of pork and soybean to drop, cutting into mom and pop farm's already razor thin profit margin.
China's move also has a political sub-context - one of Trump's most loyal voters are farmers and working-class Americans. Coincidentally the areas that produce soybeans and pork are also areas where a large part of Trump's voter base is located (the so-called heartland/Mid-West). This is likely to change as jobs are lost and crops are sold for bottom dollar.
In fact, the latest polls have shown that Trump's disapproval ratings of his handling of the position of President have plummeted to 56%. Although this effect might have been compounded by his controversial "zero tolerance" immigration policy that separated children from their parents.
What's this mean globally?
What the tariffs mean at the global level depends on who you ask: many market analysists say Trump actually has a point, other countries indeed have a significant trade imbalance with the U.S. The measures taken to remedy this though are high risk. We have already seen the diplomatic fallout it has created amongst the U.S. strongest and oldest allies.
If you ask historians - brace yourself, it gets dark quick - some say looking back at the Reagan tariffs on Japanese products - the damage was actually incurred by the U.S. economy. Others say the last large-scale trade war, started with the Smoot-Hawley Tariff Bill - not only extended the Great Depression it contributed to the events leading up to WWII.
If you ask market watchers, they will tell you it puts a choke hold on the economy - it saves some jobs but then causes prices to increase. An increase in prices, in turn, could cause job loss, making the measures a fool's errand.
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Tariffs and the trader
If you are a forex trader or indices trader - the tariffs might not be all that bad. Experienced traders know volatility means more risk but also more opportunity. During the bitcoin bull run (yes, that old, tired and moldy chestnut) some trader made off like thieves, while others lost significant amounts of capital.
Also, as the tariffs and retaliations intensify, currency dynamics and correlations are likely to change - likely in line with the volatility GBP experienced due to political instability and Brexit negotiations. No matter what happens in the near future, keep your eye on markets, because things are likely going to become very interesting.
This is a press release provided by easyMarkets.com
