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John Chatfeild-Roberts: Trade wars – reality or bargaining chip?

President Trump’s trade tariffs have got the world’s attention but are there more games to come?

The predominant consideration for most investors is the current economic climate and its longer-term prospects. Because those things change relatively slowly, however, they tend to be in the background.

That said, they sometimes move squarely into investors’ headlights and cannot be ignored, and recent weeks have been just such an occasion.

First, the appointments of Mike Pompeo as US Secretary of State and John Bolton as National Security Adviser signal the Trump administration taking a sharp lurch to the political right.

Both are neocons with robust views about North Korea, Russia and Iran. There is every possibility, for example, that in May the US will tear up its side of the Iranian Nuclear Containment Treaty and reapply sanctions to Iran’s oil exports, as well as putting the US on a collision course with its allies and co-signatories who oppose such a measure. The oil price has already spiked 10 per cent in anticipation.

Second, one of Trump’s three strategic economic objectives, alongside tax reform and infrastructure spending, is the regeneration of US heavy manufacturing. Dealing with the $300bn annual trade deficit with China is pivotal in doing so.

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Hence Trump’s “America First” policy, which appeals directly to his core political constituency, the bust-up rust-belt and its disaffected lower middle-class, blue collar workers whom he needs to back him again in the autumn mid-term elections if he is going to retain a Republican majority in both Houses.

On 1 March, shortly before the G20 finance ministers met in Argentina, Trump announced trade tariffs of 25 per cent and 10 per cent respectively on steel and aluminium products imported into the US.

Cue howls of protest from Europe, which expects the tariffs to hit its own metal-based exports to the US and to cause cheap materials to be dumped in its market as China seeks replacement customers.

The response from China was predictably tit-for-tat, as it came back with tariffs on a wide range of goods imported from the US (peanut butter, wine and so on) to an equivalent economic value.

But subsequent exemptions from the US tariffs, even if temporary, raise questions about Trump’s real intent. Is this a policy based on conviction to be carried through whatever the cost? Or is it a bargaining chip to be used as leverage in a geopolitical power struggle?

China has already offered to meet the US to negotiate a truce. Will the tariffs be used to chivvy China to a more constructive position in the negotiations with North Korea? Trump has also indicated a possible relaxation for Germany and its car exports to the US, but is the quid pro quo that Germany must increase its defence spending to at least the minimum 2 per cent of GDP as required by its Nato membership? Time will tell.

Behind the numbers: Are there more corrections to come?

Economists remain divided over the true impact of the tariffs: are there clear winners and losers as Trump seems to believe?

Is it a zero-sum game in which it all evens out? Or, as Governor of the Bank of England Mark Carney suggested, is it that nobody wins, everyone loses and we should allbe worried?

Economic history is littered with examples of tariffs being applied and countered, barriers raised and lowered (despite its advocacy of globalisation and frictionless trade, the EU’s own Customs Union is a prime example of a protectionist trade barrier), and the reality is that the data can be made to fit whatever case suits one’s own agenda.

Nevertheless, investors that are already worried about potential inflation and central banks’ responses now have the additional concerns of rising tensions between belligerent nations and potential trade wars. It is reasonable for many to feel more cautious.

John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team

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