Trump vs the world: global trade war

Some of the world’s largest economic superpowers stand on the brink of a trade war. Find out what a global trade war could mean for financial markets, and take a position with IG. 

Why might there be a global trade war?

On 23 March 2018, Donald Trump announced that his administration would be imposing a 25% tariff on steel imports and a 10% tariff on aluminium imports.

Initially it seemed that the measures were aimed at the US’s long-time economic rival, China, as many countries were declared exempt from the trade tariffs. But on 31 May, Trump announced US tariffs on imports on the European Union (EU), Canada and Mexico, and reignited fears of a global trade war.

What is a trade war?

A trade war is the escalation of policies between two or more countries that aim to create barriers on each other’s trade. It is typically accomplished by imposing tariffs or quota restrictions on imports. 

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Markets to watch during a trade war

Financial markets across the world have already experienced significant volatility in anticipation of a trade war. Not only will the restrictions impact upon companies with direct links to all the countries involved, but consumers could feel the squeeze as well.  

If the tariffs are imposed and the trade war escalates, here are some key markets to watch out for: 

Tariff announcements caused the  Dow Jones, S&P 500 and Nasdaq 100 to fall sharply as some of their larger components devalued. 

As well as domestic indices, the trade disputes could play out across global markets such as the DAX and FTSE 100.

The costs associated with a trade war could damage American businesses in sectors such as manufacturing, agriculture and even microbreweries, as the price of importing rises.

US tariffs on imports could impact companies who bring in crucial components from abroad – such as Apple. While retaliatory tariffs could hit companies that rely on exports – such as Harley-Davidson who make a large amount of sales to the EU.

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Any disruptions to supply and demand between the world’s largest economies could result in a shift in commodities markets. For example, crude oil  fell 2% on 6 March after Trump threatened further action. 

Meanwhile, gold and silver prices could rise as investors use them as safe havens against the declining stock market. 

Forex markets could see volatility as the US dollar fluctuates against other global currencies. 

Keep an eye on the currencies of all the countries involved – including the euro, the Mexican peso and Canadian dollar – as well as safe-haven currencies like the Japanese yen.

While the announcements may rattle markets in the short term, traders and investors around the world will attempt to predict what this escalation could mean in the long-term and adjust their strategies accordingly.

Trump vs China trade war

Arguably, the US and China have been waging a silent war for years. But as China has become more ambitious for its economic future, the US has started to see its practices as cause for action. 

America first 

Throughout his Presidential campaign, Donald Trump’s ‘America first’ vision promised a protectionist agenda that would promote the growth of domestic industries. 

He considered China central to the problem, criticising it for saturating international markets with cheap metal. Not only did this put US manufacturers on the back foot, Trump argued, but it weakened the US’s capacity to self-supply the materials for military arms.

This made China’s actions an issue of US national security, and grounds for tariffs under World Trade Organisation legislation.

Made in China

Battle lines have also been drawn over the technology industry after Chinese President Xi Jinping announced his ‘Made in China 2025’ initiative. The plan encourages China to become a self-sufficient producer of technology, rather than relying on US-based companies – such as Apple (Apple Inc (All Sessions)). 

The agenda has made the US increasingly protective of its home-grown tech, especially after US companies complained that their work was being stolen under the guise of ‘joint ventures’ contracts with Chinese firms. 

The ‘Made in China’ plan depends on foreign technology, so Trump’s trade war has also been cited as leverage against China’s abuses of intellectual property rights. 

What trade tariffs have the US and China threatened?

On 23 March 2018, Donald Trump announced that his administration would be imposing a 25% tariff on steel imports and a 10% tariff on aluminium imports. Although the measures did not specifically target China, as the list of countries exempt from the tariffs grew, it became difficult to see it as anything but a direct threat.

Since the initial tariff, additional rounds of restrictions have come from both sides:

  • Round 1: On 2 April, China responded to Trump’s announcement by threatening tariffs up to 25% on 128 American products – including fresh fruits, nuts, wine and pork
  • Round 2: The following day the White House unveiled plans to impose tariffs worth $50 billion on 1300 Chinese products, ranging from flat-screen televisions to batteries.
  • Round 3: On 3 April, China published a list of American products that would be hit by $50 billion in tariffs, including soybeans and pork
  • Round 4: Trump announced that in light of China’s ‘unfair retaliation’ the US would consider an additional $100 billion in tariffs against Chinese goods

Read an in-depth analysis of how a US-China trade war could impact markets.

After months of silence on antagonising China, Trump renewed his threats and made it clear that this time around no one would be exempt.

Trump vs EU trade war – and beyond

Markets were left reeling as the US slapped trade tariffs on their closest allies and trade partners – Canada, Mexico and the EU.

Trump vs the EU

Again, the Trump administration cited national security as the reason for the US tariffs on imports. However, the EU argued that the restrictions were illegal under WTO legislation and launched a dispute settlement.

The more likely reason behind the US-EU trade war is an attempt to force cooperation on Trump’s political agenda – which includes NATO spending and pulling out of the Iran nuclear deal. 

Trump vs Canada and Mexico

The announcement came as a surprise to Trump’s neighbours, who had been in negotiations with the US over a new North American Free Trade Agreement (NAFTA).

But Trump announced that the US would agree to a ‘fair’ deal, or no deal at all.

Both Canada and Mexico have made it clear that the restrictions are an affront to the partnership between the three countries.

What trade tariffs have the US and EU threatened?

Within hours the US tariffs on imports had sparked concerns of a global trade war, and caused a torrent of retaliatory policies from the EU, as well as Canada and Mexico:  

  • Europe announced that it would launch trade tariffs that would affect $7.5 billion worth of US exports, on everything from motorcycles to bourbon whiskey
  • Canada outlined $16.6 billion worth of tariffs on US products, including toilet paper, maple syrup, steel and aluminium
  • Mexico stated it would retaliate proportionally, imposing equivalent measures on US goods including foil, lamps, apples and cheese

What next for the global trade war?

It is not yet clear when, or even if, all of these measures will come into effect. But it is not just the tariffs that are giving global financial markets cause for concern: as the world inches closer to a trade war, there are plenty of other ways tensions could impact the global economy.

For example, China could sell a large chunk of the $1.17 trillion of US treasury bonds it holds. This could cause havoc across international markets, impacting US interest rates, and indeed the health of the US economy.

Chinese President Xi also revealed that he would consider the impact of a gradual yuan depreciation, using the currency to offset any impact on trade. Though nothing has been confirmed, the yuan weakened by 0.2% in onshore trading after the announcement on 9 April.

The EU, Canada and Mexico have made it clear that they will defend their national interests in compliance with international regulations, but the growing tensions have still caused concern about the relationship between the US and its allies going forward.

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