How Trump’s trade tariffs may release the four horsemen of economic apocalypse

Anthony Rowley says that once the targets of Trump’s trade tariffs retaliate, currency wars may follow, then financial calamity, followed by collapsing confidence in an era of widespread debt

Global Financial Crisis of 2007-2008

Anthony Rowley

Published: 1:28pm, 21 Mar 2018

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Trade wars of the kind that could ensue if US President Donald Trump follows through with his threat to levy tariffs on steel and aluminium imports would be bad enough in themselves. But the series of shocks these might entail for the global economy could be much worse.

Trade wars could easily lead to currency wars, in which exporting nations (in other words, virtually every country in today’s globalised economy) seek to devalue their currencies as a way of “getting under” rather than around tariff walls.

Volatile currencies imply volatile financial markets and international capital flows. These, in turn, imply gyrating stock and bond prices, and even those of other assets such as real estate. All this could easily morph into another global financial and economic crisis.

The dogs of war are baying louder every day it seems as Trump, probably supported by his proposed new secretary of state, Mike Pompeo, threatens protectionist actions against China and other key trade partners.

The hounds could thus become the four horsemen of the apocalypse – not the Biblical scourges of death, famine, war and pestilence, but trade wars, leading to currency wars, financial turbulence and crashing confidence.

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This is not a far-fetched apocalyptic vision but a real danger, given the delicate state of the global economy at present, for all its surface appearance of robustness. It is doubtful that Trump or his advisers realise what a Pandora’s box they are toying with.

It is worth remembering that, from the global financial crisis in 2008 up to the final quarter of 2016, the global economy had been recovering only modestly (with the exception of China, India and few others). Growth had been, as the International Monetary Fund for one was fond of saying, “too low for too long”.

What turned growth around at that point remains the subject of debate among economists but one factor was a pick-up in world trade. Thus, if Trump had chosen to deliberately sabotage the recovery (unlikely even in today’s White House), he could not have done better than target trade.

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If he does go ahead with the tariffs on steel and aluminium imports – and it is becoming increasingly hard for him to back away from that without looking like a paper tiger – it is doubtful that Chinese and other suppliers would take it lying down.

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Retaliation in some form would be needed to save face. Countervailing tariffs on various imports from the US would be likely, as the European Union has already indicated.

This would obviously affect exports and world trade but that is by no means the end of the story.

Trading partners of the US could obviously retaliate by raising their own tariffs in a tit-for-tat process but they could, and very probably would, also seek to “get under” the tariffs by depreciating their currencies and making their exports cheaper in US dollars terms.

This is where the danger of currency wars (the second horseman) begins to rear up. The world’s leading economies currently have a gentleman’s agreement (implemented via the Group of Seven) not to indulge in competitive devaluations. But all’s fair in love and war.

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Currency wars would translate into currency market and more general instability that would almost certainly damage already tenuous market confidence.

Equity valuations are already at demanding levels and it might not take much of a knock of confidence to send them tumbling far and fast.

The threatened damage to asset values (real estate and well as stocks) would probably have a reverse “wealth effect”. Whereas rising asset values encourage increased consumption and investment, it goes without saying that the reverse is true of a reverse wealth effect.

A trader on the floor of the New York Stock Exchange on February 5. American stock market indices suffered a setback in February, ending months of uninterrupted growth. Photo: Bloomberg

What’s the greatest risk to China’s economy? Look no further than its growing corporate and household debt

All of this could happen at a time when global debt has soared on the back of a long period of historically low interest rates. Total global debt – government, corporate and household – hit an all-time high of US$233 trillion in 2017, where it was equal to just under 320 per cent of world GDP, according to the Institute of International Finance.

Even if a “Trump-induced shock” to the global economy reduced the US Federal Reserve’s appetite to raise interest rates, and delayed the evil day when rising rates trigger debt defaults, the “debt mountain” is still a real threat.

There are large volumes of corporate debt due to be renewed or “rolled over” in 2018 and investor appetite for bonds is unlikely to be healthy in the midst of trade and currency wars.

Much has been done to shore up the international financial system. Since the resolution of the global financial crisis of 2008-09, another financial disaster may appear unlikely for the moment. But Trump is tampering with a global trade system that has not been tested in its present form and size. He needs to tread very carefully.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

This article appeared in the South China Morning Post print edition as: A trade war plus global debt equals disaster for all

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