Let’s be clear; the US has started a trade war

When the language coming from the leaders of countries around the world in response to the announcement on the imposition of US trade tariffs includes emotive words such as “countermeasures” and “retaliation” along with “protecting our national interests”, that is fighting talk.

Any hope that the reality may not be as bad as feared was blown away in a few minutes during the announcement. Clearly, there is some room for negotiation with the US, however, the impact is immediate and will be lasting, it’s just a case of how bad the scarring will be. Trade tariffs should be expected to increase costs and inflation, reduce economic activity, and therefore growth, reduce company profitability, whilst damaging consumer and business confidence. That will apply in the US as well as everywhere else.

The health of the US domestic economy is very important to the well-being of the world economy. The US has been showing signs of weakness recently and there is nothing in what is going on now that will help it in the short and medium term. As for the long term, of course, correcting trade imbalances should be good for the domestic US economy, but at what short term cost? The rest of the world will be impacted as well.

The impact on different countries and regions will vary. China and the EU have been clearly targeted, and they will have to respond. The UK may well come out of this reasonably unscathed and benefit on a relative basis, but that’s probably all it is in the short term, relative.

As for next steps, it will be interesting to see just what retaliation comes through, if it is limited, it may show the US is actually inviting negotiation, but the reality has to be that an element of these tariffs will be permanent as the US administration needs to raise revenue to fund tax cuts.

The immediate reaction of financial markets is unsurprising; a move to perceived safe haven assets such as gold and government bonds and a big fall in equity markets and the US Dollar. This accentuates the problem for the US consumer, a fall in the stock market has a real world impact on their wealth, as they are so invested in it.

It is hard to know how this will play out in the short term and just what the long term effects of these measures will be. But as I sit here, the morning after the news, it’s hard to see many winners, other than on a relative basis. Markets move to take into account current and anticipated conditions quickly, so they could well be reflecting all of this now, or at least soon. The problem is the unpredictability of the future at present and markets don’t like uncertainty. The sooner there is a clear line of sight, the better.