The global trade war is moving from myth to reality. Not only is there a lot of talk, tit-for-tat action from the USA, China and EU are on the rise. The US threatened US$100 billion in tariffs and restrictions on Chinese investment, so China retaliated with punitive measures against 128 American goods. Adding fuel to the fire, China said it would respond to any additional US tariffs on Chinese products with countermeasures of the “same proportion”. Hopes are fading that renegotiation between America and China or mediation by the World Trade Organization would heal the rift.
The European Union’s has warned it would respond to Trump Tariffs with its own 25% duties on $3.5 billion of American goods. Despite President Trump’s tweet that trade wars are “good and easy to win”, this conflict is unlikely to resolve without damage. Broken trade routes threaten global growth. Weak commodity prices depend on free trade: endangering this tightens supply and drives up prices. Cyclical commodities like crude oil and base metals will have a difficult time as rhetoric ramps up. Soybeans will be most vulnerable since China is targeting punitive tariffs on US agricultural products. Gold should improve, given its safe haven status. Bitcoin and other crypto might not be safe havens: they have been losing value lately.
On the surface, there is much froth. Just as markets rallied, a report of US-China trade deadlock smacked them back down. Then yesterday, Trump’s Chief Economic Advisor, Larry Kudlow, said he doubted that any concrete tariff action would happen for several months. Equities reacted significantly: energy stocks rebounded while defensive stocks in consumer staples and healthcare dropped. US treasuries rallied as risk appetite improved, 10-year yields jumped 2.80%.
By Peter Rosenstreich
