Don’t panic: the trade tiff is a realignment but not the end of the global economic order
Richard Harris writes that stock markets are indicating that the reaction to the US-China trade war talk is more of an adjustment than a cataclysm, and the Harley-Davidson episode suggests that companies will find a way around the damage
You know the trade issue is becoming hysterical when Donald Trump tweets that Harley-Davidson motorcycles made abroad would be “taxed like never before”. Even the president of the United States cannot tax an individual company for making an economic decision. They will tell him to get on his bike.
Analysts’ comments, too, are becoming increasingly emotional – that the trade skirmish means the end of globalisation, that confidence has been destroyed and that the economic world order, as we know it, is no more. They are wildly missing the mark. Of course we should be concerned that the trade tantrum will increase costs and slow economic growth but it is not the end of an era – merely a small evolutionary step in the global economy.
Trump is articulating a nagging unease in the US that they have carried the rest of the world for a long time. They have a point. Since the Marshall Plan lifted continental Europe off its knees in 1948, the US has been magnanimous, allowing largely unfettered access to its markets. Without seeming to look for it, they have received much in return; growing markets for US goods, a strong reserve currency to pay for imports, and the ability to attract hungry labour from around the world.
Trade, though, is business; it took decades of discussions with the World Trade Organisation to bring tariffs down to the low and relatively equal levels shared today by the G7. The US viewed China’s economic rise with similar benevolence, knowing it would provide cheap labour that coincided happily with the need to massively scale production into the digital revolution.
Watch: The US-China trade war and its impact on consumers
The US was too diplomatic, too understanding, too slow to appreciate that China had moved into the role of an assertive trading partner, imposing a host of non-tariff barriers to support its own industry. It took The Donald, without any appreciation of history and whose army record was cruelly cut short by a bone spur, to articulate this. He plays his hand like a skilled poker player, setting the agenda by throwing a big rock into still waters and gets his way when everyone loses their head looking for a towel.
The silver bullet in the trade debate is a single statistic. The total amount of world merchandise exports at the end of 2017 (according to the WTO) was US$4.7 trillion. Exports rose 12 per cent by some US$518 billion last year. To put this into perspective, this increase alone is hundreds of billions of dollars more than the threat of tariffs so far.
The reaction to tariff increases is like my first year at business school. There was a failure rate of 4 per cent; but 35 per cent of the class had thought that they might flunk out. World trade is affected but not threatened.
The half-year point is a good time to reflect on what the stock markets are telling us. Shanghai was down some 16 per cent in yuan (with currency weakness shaving off a further per cent). Europe has fallen by 6.5 per cent but even the US has fallen by 2.5 per cent. These are not such big declines to be predicting the end of the world, especially after a bumper rise last year.
Outside of the trade tantrum, the Nasdaq index of technology is up by 7 per cent, and the Russell 2000 (an index of US small and domestic companies) is up by 9 per cent. If the markets are a guide, cooler heads will prevail and the trade tantrum will soon blow over.
The trade discussion has been hot-headed but there is no need to become hysterical. Flowing water moves around an obstacle and, like Harley Davidson, companies will learn to adjust their supply chains, to substitute, to use third parties, to get used to the paperwork, or even just pay the tariffs.
China has made strong statements of retaliation but in reality has already increased liquidity to support its domestic economy. They have seen ZTE brought to its knees in a week by sanctions but also that Trump was quick to claim victory and relent. Like those former arch-protectionists Japan and Switzerland, China will see the advantages in opening up the economy, despite the US being irritating. Alliances are quickly rebuilt in geopolitics.
So we should not magnify the trade issue. We may well be heading for a market crash but this will be driven by debt and a lack of liquidity. Trade is not the trigger. This is merely the evolution of the “Marshall Plan for China”. The end game is that the Chinese economy will open up – and that will be best solution for all.
Richard Harris is a veteran investment manager, banker, writer and broadcaster and financial expert witness. www.portshelter.com