US President Donald Trump’s decision to slap a 25% tariff on steel and aluminium imports, turned the markets on their collective heads and raised more concerns over a trade war between China and America.
In this writer’s opinion, it is just the beginning of protectionism in the US and the effective suspension of the era of free trade between large economic blocs and North America. Oil imports to the US could be next on the tariff agenda, meaning that US oil will have a huge advantage both in domestic and foreign markets. It also means that troubles in the Middle East will have less influence on the crude oil prices because the US will be more than capable of supplying world markets.
Long term, shoring up the domestic markets at the cost of international ones may backlash on Trump in economic terms. Globalisation has gone too far to be reversed, and US companies operating multi-nationally may find themselves in a Brexit dilemma – how far ahead can you plan your investment in a region if you’re not sure about the terms of doing business. It’s fairly predictable that tit-for-tat tariff rules could be imposed on US companies doing business abroad. Going even further, licensing rules could change, and the US could find itself frozen out of lucrative foreign markets.
Global assets, commodities, securities, and currencies have reacted sharply. The USD declined, safe-haven Gold rose, Asian equities plummeted and so did Wall Street. The Euro climbed versus its rival the USD and European stocks declined on the news.
The knee-jerk reaction in international markets is the first in a series of adjustments that have to be made. As the US appears to withdraw into its shell trade-wise, other developments may be seen, such as the EU expanding more strongly into global markets and a closer trade relationship between the US and UK. Trump believes that trade wars are good, that economies will respond better, but let’s look at the fundamentals. Exports to foreign markets make up 12 percent of America’s entire 18.6 trillion USD economy (World Bank). That means 2.2 trillion USD is at risk of higher international tariffs going forward. Yes, domestic business will be boosted because imports will no longer be priced competitively, but US companies that rely on export revenues may have to start reducing their employees. A rise in unemployment would hurt the NFP numbers, and possibly slow down the Federal Reserve’s interest rate hike plans. Not to mention the limitations on exchanging and developing product innovations and technological developments.
In short, watch this space, Donald Trump ain’t finished yet.