Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
Trade War Duplicity
The trade war tantrums are spreading. And things are rapidly making less sense. But they’re getting more funny at the same time too.
In China, things are particularly interesting. The yuan is tumbling fast. Since the official start of the trade war in April, the Chinese currency has lost about 8% against the US dollar.
The Americans accused the Chinese of opening a currency war front to flank America’s trade war front. Devaluing the yuan counteracts US tariffs by making Chinese goods cheaper in the US.
‘But currency wars are so yesterday,’ reply the Chinese.
The yuan is tumbling as a reaction to America’s trade war, not thanks to Chinese policy. Traders and businesses are selling yuan in anticipation of Chinese exports falling.
The Americans complain that China used to peg its currency, so a sudden drop is unfair. Which leaves the Americans complaining about the lack of currency war policies, having begun the argument by alleging currency war policies.
Over in the EU, the politicians are absolutely furious about Trump’s trade war policies targeting Europe. In return, Trump alleges Europeans are unfairly subsidising certain industries- especially agriculture.
Meanwhile, Trump is introducing $12 billion in subsidies for US farmers.
Of course, Trump’s policies are only ever retaliatory. In the case of subsidising US farmers, they are actually retaliation in retaliation to the EU’s retaliatory tariffs of the US’ retaliatory tariffs to EU subsidies and tariffs.
The EU, having accused the US of unfair tariffs, is imposing levies on Chinese e-bikes because of so-called dumping. The Chinese are unfairly supporting e-bike manufacturers, leading to heavy losses for EU e-bike manufacturers. Which is the argument that Trump makes against Europe on steel and agriculture.
EU leader Jean-Claude Junker is happy to meet with Trump to avoid a trade war, but on Brexit, he stands firmly against trade.
In fact, a hard Brexit would, by default, impose Trump-like trade policies on British and EU trade. That’s where the Remainers get their forecasts of disaster from.
The real question is what sort of trade policies the British would decide on in the aftermath of Brexit. Because that’s when they regain the power to make their own trade policy.
If Britain takes a pro-trade stance, then all the doom-and-gloom Remainers would worry about is the result of EU anti-trade policies, not British ones. That would make it blatantly obvious who is to blame for the resulting problems.
A world where Britain doesn’t impose tariffs on European products is a fascinating one. EU subsidies of French agriculture would mean that the German taxpayers would be paying for Britons’ cheese and wine.
Trade war tantrums are becoming weirder
Back to trade tantrums.
Inside the EU, the Italian government is considering sabotaging the Canadian Free Trade Agreement because it doesn’t provide enough protection for Italian agribusiness.
At the G7 summit, Trump came under fire for imposing tariffs on trading partners. So he suggested discussing a world with ‘no tariffs [and] no barriers’ to trade. But nobody paid attention to that comment.
The Japanese and EU managed to pull off their free trade agreement. But nobody in the Japanese household I’m in could find anything on the list of freed-up products they’d consider buying. Plenty are still taxed under the agreement.
Trump’s Twitter tantrums add plenty of comedic value to the trade war. In anticipation of Junker’s visit to Washington, he told his Twitter followers what’s really going on:
‘Countries that have treated us unfairly on trade for years are all coming to Washington to negotiate. This should have taken place many years ago but, as the saying goes, better late than never!’
And there’s no need to worry about Trump backing down:
‘Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that — and everybody’s talking! Remember, we are the “piggy bank” that’s being robbed. All will be Great!”’
The pain of Trump’s tariffs is real. According to Reuters, the German think tank IMK calculated ‘U.S. President Donald Trump’s tariffs will lead to a drop in prosperity in Germany this year and are likely to cost Germans up to 20 billion euros ($23.44 billion).’
And ‘On Friday the head of the DIHK Chambers of Commerce said tariffs on imported cars that the United States is considering would slash around 6 billion euros ($7.03 billion) off German economic output.’
I wouldn’t trust the car companies’ data, though. The EU reckons it’s caught them overestimating emissions. This is a bit odd in the aftermath of being caught underestimating diesel emissions.
But it makes sense when you realise the EU is going to put new standards in place. These will suggest cutting former emissions by some percentage. So the higher you estimate them now, the easier it gets to cut them in the future.
But as the German car lobby pointed out, higher emission would make EU cars less competitive among consumers.
It’s all a bit odd.
Some Aussies insist we’re the worst hit by the global trade war, despite being completely uninvolved. If Chinese exports drop, so do Australian exports to China. Investment bank analysts are competing over how bearish their Aussie dollar forecasts have to be to make the news.
But there’s good news for Aussies too. The Chinese have announced a new stimulus package to counteract the trade war. It’s a third front — the fiscal war.
A few days ago, the People’s Bank of China, responsible for currency war policies, accused the Ministry of Finance, responsible for fiscal wars, of not being ‘proactive’ enough. Infrastructure spending growth fell from last year.
So the Ministry of Finance has announced some ‘proactive’ policies, such as making certain corporate expenditure more tax deductible and speeding up tax refunds.
The Germans have opened up a new front in the trade war too. It’s one I suggested Britain should try years ago. I call it an immigrant war. You steal the other nation’s best and brightest by giving them citizenship.
Australia has been doing this for years. Thanks to immigration and Chinese fiscal stimulus, it avoided a recession in 2008 and 2009.
The Germans are considering treating Brits who are applying for German citizenship and residing in Germany as EU nationals. And they’ll make German dual citizenship easier.
What does all this trade war duplicity mean?
Isn’t it obvious?
Governments around the world are very busy saving us. So don’t worry, just vote centrist.
And don’t forget, as Trump explained on Twitter, ‘Just remember, what you’re seeing and what you’re reading is not what’s happening.’
Until next time,