What will Trump’s trade war bring? - March 10, 2018

What will Trump’s trade war bring?

The President of the United States announced that he wishes to impose a 25% tariff on steel and 10% tariff on aluminium. Donald Trump also said that he’s ready to put a 35% tax on European cars. But how far the US can take a war like this?

Last week, Donald Trump surprised the world with announcing his ideas about a trade war to protect the United States. He imposed tariffs on steel and aluminium, but also mentioned one on European cars. He and others dubbed his plans as a trade war.

Details of the war

The President of the United Sates gave the details of this war: a 25% tariff on steel, a 10% tariff on aluminium. This may hurt several, historically pro-US countries like Canada, South Korea, Japan and Germany severely. Several of them announced in an instant that if Trump does put a tariff on steel and aluminium, there will be consequences.

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Canada said that any tariffs on steel and aluminium will have retaliations. Jean-Claude Juncker, president of the European commission also said that the EU is willing to respond to these threats by putting tariffs on US imports. The American president didn’t wait too much to reply: European carmakers can face a tariff up to 35%.

A war that’s easy to win?

Trump believes that “Trade wars are good, and easy to win.” At least, that’s what he tweeted not long after he announced his plans. But most analysts believe that he is wrong. A trade war would hurt the country’s diplomatic relations. A war could also hurt the US economy severely without giving any real advantages to it. It’s not sure that these tariffs can really help the American steel industry for example.

We believe that tariffs like this may cause higher inflation, leading to higher prices in the US. Generally, protectionist policies aren’t good for currencies, but a weaker dollar may help export. (We expected a weaker USD before the greenback gets stronger just last week.) Still, a trade war may lower the US GDP which isn’t good for the economy. Tariffs may also launch widespread trade wars which is bad for global trade. So it seems that trade wars aren’t easy to win and they don’t really help anyone.

Last time this was a bad idea

It’s easy to see why not everyone is happy about Trump’s plans. His own party members are disagreeing. As The Guardian put it: “the plan breaks from Republican orthodoxy on free trade and has left members of Congress scrambling. They warned that a trade war would hurt US companies and wipe out recent economic gains.”

This is not the first time a US president tried to launch a trade war. In 2002, George W. Bush imposed a 30% tariff on steel, but soon they faced retaliations from other countries and a $2 billion sanction from the World Trade Organization. Back then, S&P500 (and other indices) fell 30%. Months after seeing where a trade war leads to, Bush changed his mind and they withdrew the tariffs. Many expect that something similar may happen now.

Trump already announced that the tariffs will come off at least for Canada and Mexico if a new NAFTA deal is signed.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.