Markets learn to live with some protectionism

Tariff ahead

On Monday 15th July, President Trump lent the White House lawn to US manufacturers to celebrate the ability of the US to make things for itself. He explained that it is a win-win situation if the US buys products made just down the road, with more and better-paid jobs resulting from the purchases. He signed an Executive Order to increase the required US percentage of components in a US product from 50% to 75%, which affects US government procurement. In the case of steel, he wants 95% US product to be used. It is a further development in his America First policies designed to increase industrial investment in the US and to cut imports of foreign-produced goods.

The President has made widespread use of new tariffs and threats of new tariffs on foreign-produced goods to seek to reduce the large US trade imbalance and to favour jobs at home. So far, the US trade deficit has remained obstinately high. The White House took on Mexico and Canada, and then settled for a revised trade deal to replace NAFTA. It is still battling with China, with substantial tariffs imposed. The President has tweeted disobligingly about all the cars Germany sells to the US, without as yet taking tariff action against the EU. He has complained that the US only charges the EU 2.5% tariffs on imported cars, whilst the EU charges 10%.

The May figures for the trade deficit showed it running at $55bn for that month alone, after a year at $621bn in 2018. The deficit in goods is even bigger, with services providing some offset. The goods deficit with China remains particularly elevated despite the introduction of import levies in the US. It ran at more than $400bn in 2018. The US continues to import a substantial number of cars from the EU.

The world is moving towards more economic nationalism

The EU, for its part, condemns protectionism and argues against new tariffs on world trade. At the same time various major EU countries are working up proposals to tax the large multinational digital companies by imposing a turnover levy on their advertising revenues or general sales. There is discussion of imposing a carbon border tax on products from countries that are not following the world targets and policies to cut carbon dioxide outputs, which is also primarily aimed at the US. The EU is aware that the US is getting a substantial competitive advantage out of developing more gas and oil output and using relatively cheap energy to make things for sale, and thinks that it might be permissible under World Trade Rules to make US products a bit dearer as an offset through a carbon -related tax.

This is all unhelpful noise in the background of world markets. Singapore has just shown the vulnerability of international trading centres to any slowdown or interruption to world trade, with a fall in output and income in the second quarter of 2019, taking its annual growth rate down to almost zero. The OECD is warning the EU to loosen up a bit more to avoid its slowdown reaching a stall. Meanwhile the more accommodative fiscal policy and credit policy in the US is keeping the country’s economy moving forward more successfully than most of the advanced world.

The truth in these trade disputes is all the main players seek to tip the balance in their favour by methods which the others dislike. China is under challenge for its attitude towards subsidies and support for nationalised industries at home, and her approach to intellectual property worldwide. The EU is particularly protective of agriculture, and now wants to use tax policies to limit US success. The US imposes tariffs in a regular push to change the big deficit she runs with China and others, only to find the growth of the US economy still encourages Americans to buy many overseas products. There are various ways of offering domestic producers preference in public sector contracts around the world, especially in national-security related purchases.

The world is moving towards more economic nationalism, and is having to get used to living with a bit more protectionism. Over the last year this has provided plenty of negative headlines, but the main movements of markets have had more to do with interest rates and the attitudes of central banks. It is the current expansion of US money supply coupled with the tax cuts that has allowed the markets to make more progress upwards.


The above article was previously published by Charles Stanley on 16th July 2019