To understand the real threat of trade wars to the global economy, it's time we took Trump seriously

Could this be another 2008? At the moment the consensus answer to that is no. If it were yes, the markets would be plunging – and they’re not

Hamish Macrae
Saturday 14 July 2018 16:02 BST
Trump: 'The EU has treated us very badly'

It has been a funny few days for those of us who prefer to try and work out what is happening to the economy rather than fuss about politics.

On the one hand, the financial markets have held up pretty well, with the Dow back above 25,000, and FTSE 100 actually higher than it was on the first day of trading on 2 January. Given all the stuff thrown at global business recently, that is not too bad.

On the other hand, there is also fear. That fear is hard to pin down, and if it were easy we would have seen a more violent market reaction. At the moment, the markets are nervous about that fact that politics may actually have a bigger impact on economic activity now than before – and that would impoverish us all as a result.

The chief disrupter, of course, is Donald Trump. We had an example of that with the on-off business of a trade deal with the UK. As Vince Cable has pointed out, a hurried trade deal might well be to the UK’s disadvantage, but leaving that aside I’m not sure how valuable even a well constructed deal would be. Yes, it must help. But the US is the UK’s largest single export market already, though if you add up all the EU countries they are bigger than the US.

What is true is that trade deals encourage more complicated supply chains. That has happened with the UK’s membership of the EU, and it is one of the reasons why some sort of interim trade deal is so important. The UK is not so much a prisoner of the EU; it is a prisoner of European supply chains. But if you look around the world there are hugely complicated supply chains that have nothing to do with trade deals. Those noisy Osprey helicopters escorting Donald Trump around London this week have Rolls-Royce engines. Your iPhone is assembled in China; your Samsung (now the world’s biggest manufacturer of silicon chips) is made in Korea; and the software for both was developed mostly in the US.

There is an important long-term question as to whether these hugely complex supply chains are really a good idea. Have we created too complicated, and hence too vulnerable, a world economy? I think the answer is probably yes. But the immediate question now is whether a trade war, if that is what we are facing, will really undermine economic growth. Could this be another 2008?

At the moment the consensus answer to that is no. If it were yes, the markets would be plunging, and they’re not. The best way to get one’s mind around this is to take what Donald Trump says seriously but not literally – as noted during the election campaign, with the first reference I can find being in the Atlantic back in 2016.

So there will continue to be huge pressure on China and the EU to open up their markets to the US, but at the end of the day there will be an accommodation with both. But the detail of what the president says does not matter; it is the thrust of US policy that does. It seems safe to assume that the pressure will be ramped up until there are some concessions by both China and the EU.

Retaliation simply won’t work. Yes, it is annoying for bourbon producers to have to pay a higher tax to sell their stuff in Europe, but neither China nor the EU can seriously damage the US economy. They can pick off bits, and overall the tariffs the US is imposing can push up US inflation. That is happening now, though it is hard to know how much to attribute to tariffs as such. What is really interesting, however, is that US business as a whole does not support the administration’s trade war policies.

That is an odd outcome. A president starts a policy designed to strengthen the US economy, but the companies that run the economy don’t like it. So maybe it isn’t such a great policy after all, and once the rhetoric has faded (and some headline-catching “deals” have been done) it will be business pretty much as usual.

And for the UK? Trade deal or no trade deal, the UK will do more business with the US, simple because its economy will grow faster than that of Europe. Proportionately it will buy less from Europe, despite the free trade arrangement that will eventually be negotiated. As for services, the UK will focus its exports more on the rest of the world rather than Europe and while there will be short-term losses, there will be long-term gains – again, simply because other markets will grow faster.

The basic point here is that the world economy is pretty tough. These trade skirmishes do some damage in the short term, just as the UK leaving the EU will do some damage for a couple of years. But the tensions have to be much, much worse to wreck global growth.

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