The Daily Update - Trade Wars; Watch Out Trump

In our two-part daily, we'll be discussing our thoughts on the Trump administration's tariffs:

Donald Trump’s decision to start a global trade war, and subsequent escalation by the US administration could become very damaging for the world economy. How this impacts the consumer can be seen through the recent decision by Tesla to raise prices in China in an effort to pass on the additional costs. This, in turn, reduces the spending power of consumers. In the case of luxury goods one option is to buy a cheaper alternative or postpone spending entirely, but for more basic goods that is often not an option. So further escalation of the trade war by the Trump administration risks a slowdown in consumer spending and with the Fed still in tightening mode, creates the conditions under which the world suffers another global recession and an accompanying global financial crisis.

At the root of the US administration's predicament is the country’s unsustainably large current account deficit which is the largest in the world. Simply put, the US is spending more than it can afford and this is causing a rapid rise in US debt; which is also the largest in the world in absolute terms. This leads to global imbalances which unfortunately are much larger now than they were in 2008, so the potential fall-out from this could well be much larger this time around.

For this, the US is only partly to blame; a significant driver of global imbalances is the EU with Germany being the main offender. The fixing of exchange rates between countries with differing levels of productivity will inevitably lead to current account surpluses in the most efficient and deficits for those that are less competitive. Germany is an extreme example of this with a current account surplus of USD 347bn.

Whilst China has the third largest surplus in the world (behind Japan) this represents just 1.2% of GDP. The Netherlands, a country of just 17 million people, manages to run a current account surplus which is the fifth largest in the world and equates to an eye-watering 9.6% of GDP! Germany’s figure at 8.2% of GDP is hardly any better. The scale of the imbalances are brought about through a naive political belief that monetary union is some form of an economic solution; in fact, it is sowing the seeds of a major financial catastrophe. Donald Trump’s trade war is really a byproduct of decisions made elsewhere, although it comes at a very inopportune time.

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