Trade War Alliances Emerge

Trade War Alliances Emerge

It’s bad news all-around. Not that anyone can agree on what’s good or bad news these days.

And even if we could, there’s no agreement on whether good or bad news makes the market go up or down.

Perhaps, even if things do take a turn for the worse, central bankers will just up their efforts and push the market up again.

Or good news will allow central bankers to reduce their quantitative easing, pulling the rug out from under the levitating market.

Whatever you think of the implications, the lesson from this weekend is that everything seems to be escalating.

In Hungary, the EU critic Viktor Orbán was re-elected president. His party will hold on to power in parliament too. Orbán claims to be pro-EU, but against a huge chunk of what the EU actually does.

That turns out to be a very popular political position because it’s agreeable and vague.

The key issue is immigration. Which is ironic given how Western EU states used to perceive Hungarian migrants.

Orbán threw up some of the EU’s first internal borders and refused to accept its refugee quota during the migrant crisis. Other nations quickly followed suit once they saw him get away with it.

What effect does the Hungarian election have on the EU? Well, if the Hungarians want to steer the EU into a more protectionist route, it makes life more difficult for EU globalists. The EU could undergo dramatic change in coming years.

Orbán also exposed the EU’s lack of enforcement ability. To EU leaders, inclusiveness is more important than compliance with EU law. EU voters want to be in the union without having to follow its rules. The combination spells big trouble for the EU’s pillars. If some can be flouted, so can others…

A notable factor during the election was the failure of George Soros to engineer much of a challenge. The billionaire who broke the Bank of England has been meddling in election campaigns and social cause campaigns for years now. But in his home nation he didn’t achieve much. Where does this leave his other efforts?

With EU elections coming in 2019, Hungary’s election is just another warning shot. If the composition of the EU parliament changes to reflect the views of people in the EU, that’d be rather interesting given how much those views have changed since the last EU election.

A protest vote in a national election is one thing. You get the likes of Donald Trump and Orbán. But in a body like the EU, a protest vote would be a fascinating development. Imagine the EU parliament with a sizeable chunk of Euro-sceptics sent in. It’d be bizarre.

The Hungarian election was closely watched in Italy, which still hasn’t formed a government a month on from the election. The standoff is too complex to feature much in the English-speaking media.

Because the moderates who ruled previously have committed to being the opposition party, it leaves the remaining three parties in a deadlock. None want to rule with any of the other three. They’d all be terribly hamstrung by their coalition partner’s conditions.

This is of course what the Italian people want. A government that doesn’t do much except what everyone can agree on. Imagine how much less law there’d be if UK governments were so ineffective. We’d be freer, richer, and politicians would be on TV less.

In the US, Trump’s trade war continues. The Chinese backlash to Trump’s third round of tariffs triggered a fourth round. Trump is now threatening US$100 billion of Chinese goods with tariffs.

The US stock market plunged over 2% once more last Friday in response to Trump’s threats. But Asian markets didn’t open down on Monday morning, and that kept the UK’s major index, the FTSE, up too.

Over the weekend, alliances began taking shape as the trade conflict goes global. Japan requested to be part of the US’ World Trade Organization case against China on unfair intellectual property practices. Under Chinese rules, countries have to hand over their trade secrets if they want to operate in China.

Britain is siding up to Trump in the hope of helping a trade deal along too. And the EU is trying to avoid getting caught up.

Meanwhile, the US economy might be dropping out from under Trump’s feet. The yield curve has turned negative two years out. That basically means market traders expect interest rates to decline in about two years, suggesting a recession will occur then.

If a recession comes before central banks have returned interest rates to levels they can cut from, they can’t alleviate the recession.

After a decade of sudden financial crises, we’ve forgotten how slowly the economy rolls over when it does in an ordinary recession.

Perhaps that’s just what’ll occur. With so many dramas playing out around the world, a stock-standard recession would surprise everyone.

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Trade war rhetoric is all talk

The presumption behind much of the trade war rhetoric is that exporting nations have more to lose during a trade war. That’s why Trump is so confident he’ll win. If the importing countries reduce demand for import goods, that’ll upset the export economies. They’d rather do a deal.

The secondary issue is that the initial trade imbalance was brought about somehow. If it was thanks to unfair trade practices, then retaliation is supposedly justified. Subsidies and trade restrictions in China and the EU feature here. And according to those terms, Trump is again right.

But none of this makes much sense if you adopt the worldview people used to have.

If I tell you the Chinese government is subsidising cheap goods for Aussie consumers, that sounds like a pretty good deal. We’re getting cheaper stuff at the expense of the Chinese.

It’s only a bad thing if you somehow presume that Australian companies and employees can’t find other things to produce. Which they can and do in the normal course of the economy changing naturally anyway.

Countries with a trade deficit used to be seen as better off because they were living rather well, without having to work as much. The modern understanding of trade balances has reversed. But never does anyone acknowledge both sides of the same coin at once.

Once you do, you realise the trade war is just as politically motivated as all other wars. It’s not about economics or jobs. It’s about creating an artificial crisis and then being seen to be doing something about it.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia