Expect further turmoil as Donald Trump yo-yos on tariffs

Expect further turmoil as Donald Trump yo-yos on tariffs

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Donald Trump’s move this week to delay tariffs on about $160bn worth of Chinese imports until December marked the latest twist in the trade war between Washington and Beijing, which has lasted almost a year and a half. Just two weeks ago the US president was saying they would take effect on September 1.

The purpose, Mr Trump explained, was to shield American consumers from the pain of higher prices in the holiday shopping season, since many of the affected products are Christmas staples such as toys, video game consoles and smartphones.

But the White House may be grappling with a much bigger problem in the coming weeks and months: that the damage from the trade wars, both to the global and US economies, may have already been done, and there is little the administration can do to mitigate it.

The move by Mr Trump to delay the imposition of some tariffs was consistent with his approach on trade all along — a yo-yo-like alternation between confrontation and conciliation. The former is designed to display toughness and force concessions, while the latter is aimed at soothing the markets and keeping business hopeful that an agreement can be reached.

But Mr Trump’s success at managing markets may not last for ever if economic conditions continue to sour across the globe. This week new data showed that Chinese industry was suffering and the German economy had contracted in the second quarter, while the US Treasury yield curve inverted — historically a reliable indicator of a looming recession. The equity market rally that followed Mr Trump’s announcement of a tariff delay on Tuesday was eclipsed by a big slide, followed by a sharp rally in government bonds which set fresh records on Thursday as investors sought safety.

The US president may have been lulled into a false sense of security about the impact of his trade wars on the American economy, given the fact that employment has remained relatively strong, consumption has been solid and inflation has remained tame. But business investment data — which is more sensitive to the global economy and policy uncertainty — has been raising alarm bells for some time now.

Mr Trump has been counting on the Federal Reserve to step in with monetary stimulus to help protect the US economy and his re-election chances from a possible recession. Yet there are big doubts about whether the central bank’s measures will be sufficient to do the trick, even if it presses ahead with more aggressive interest rate cuts as the White House has long been demanding.

Mr Trump could, of course, bury the hatchet with America’s trading partners and refrain from further escalation in the hope that this could help steady the ship in both the economy and financial markets. This would probably involve striking a deal with Xi Jinping, the Chinese president, to stop the December tariffs from ever kicking in, and not ploughing ahead with EU auto tariffs later this year. 

Yet Mr Trump is unlikely to make any dramatic shifts that would make him look weak, which means further turmoil should be expected.

Pelosi warns over US-UK trade deal hopes

It was always known that a big hurdle to any post-Brexit trade deal between the US and the UK would come from the US Congress. Now Nancy Pelosi, the Democratic Speaker of the House, has issued her clearest warning yet that if Boris Johnson’s government leaves the EU on October 31 with no deal — leading to a hard border in Ireland — it would fail to pass muster on Capitol Hill. 

“If Brexit undermines the Good Friday accord, there will be no chance of a US-UK trade agreement passing the Congress,” she said on Wednesday, a day after John Bolton, the White House national security adviser, trumpeted the chances of a quick deal with the UK on a visit to London.

No doubt, US and UK officials will be exploring ways to craft an agreement or mini-deals on trade, that could elude congressional scrutiny. If not, they might hold out hope that the power of the “special relationship”, even if it has been severely tested in recent months, may still make a deal with the UK hard to resist on Capitol Hill.

But battle lines have been drawn, and they don’t bode well for a rapid deal.

Chart choice

With the US-China trade war showing no signs of ending, the share of Americans with a negative view of China has risen to 60 per cent — a new high. 

The number: minus 0.1 per cent

German economic output contracted in the second quarter as trade tensions consumed Europe’s largest economy.

Further reading

● Donald Trump’s assault on the global trading system (Foreign Affairs)

● Russian sanctions and the Senate majority leader Mitch McConnell (Washington Post)

● The market slump is not just about trade (New York Times)

● More on Trump’s partial tariff retreat (FT)

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