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Trump, trade-wars and time

This morning I went to my daughter’s assembly. If you’re a parent you likely know the drill; you attend under the guise of watching your child perform. Whilst they attempt to ensure they do their parents proud, the parents are jostling for the prime position to ensure that they’re seen. If you’re not seen were you really there? Fortunately, I was sat in the front row.

It feels like world leaders have been doing the opposite to parents, all using the same week to announce big changes. In a normal year, the World Economic Forum in Davos would dominate headlines. But this week we’ve had Theresa May announce that Brexit means leaving the single market, conversations at Davos on responsive and responsible leadership, and then the small matter of the US Inauguration.

President Trump

Friday 20 January is the day the United States will have a new president. One who divides opinion and promises to take America into a new phase. Donald Trump’s views on trade have been well documented, and present an interesting consideration for financial market commentators. Trump seems to see free trade as a bad thing, something that takes jobs away from US citizens. This is largely at odds with conventional economic thinking which sees free trade as contributing to global growth.

If the US were to put up trade tariffs what would this mean for those outside America? If the US were to increase tariffs, that is to increase the tax charged on imports, then trading partners would likely follow suit. That would mean that it would be more expensive to bring in US goods, and more expensive for the US to bring in ours, trading levels would likely reduce, and there would be a negative impact on global growth.

Is a hike in trading tariffs likely?

Since his election in November, Trump has been quite vocal, suggesting to various manufacturers that they should invest in the US. This has been most notable in the automotive sector, and there have been announcements of plants being opened in the US, rather than Mexico.

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The US president has a large amount of discretion to decide what should be done when it comes to trade, this can largely be decided between him and his leadership team. So we can expect that if changes in trade are to come, they could come quite quickly.

This is even more relevant given that Trump’s key trade officials are of a similar mindset, notably Robert Lighthizer, newly appointed US trade representative, and Peter Navarro, the new head of the National Trade Council.

The impact of tariffs

Opinions vary on the impact that tariffs could have. Some estimate that whacking on a tariff would generally increase growth in the short-term in the US, but they would suffer in the long term. If you were focussed on the long term, you might think that tariffs were a bad idea, but if you wanted a quick win early on then it might be appealing.

It’s always worth remembering that the US is not a particularly open economy, and so the impact of tariffs could be more muted. Usually you define openness as trade (exports + imports) as a percent of GDP. Looking at the figures for 2015, we see that the US is actually one of the most closed economies globally on this metric. Trade as a percent of GDP was around 28% in 2015, compared to the UK at 56%. The least open economy in 2015 (for those where we have data) was Sudan at 19%.

Equity valuations can be viewed as an indicator of where things are going. Given where these currently are, an impending trade war seems unlikely. So what does that mean? Perhaps a focus on long-term growth will prevail, and we’ll only see muted change in tariffs and the sell-off in emerging markets equity represent a good opportunity for investors over time.  But this all depends on what will be announced not just in Trump’s first 100 days, but also throughout his term as president.

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