The art of dealing with Trump’s trade war

“Oh, what a stupid trade war.” That’s how economist Paul Krugman summed it up last month when the U.S. decided to hit its closest allies with tariffs on steel and aluminum. Since then, Donald Trump’s stupid trade war has only got stupider.

Canada hit back with almost $17 billion in tariffs on United States goods, while the EU has retaliatory levies of about $4.3 billion in store. That was followed by the thriller in Saguenay, a G7 Kumbaya moment that left such a sour taste in the president’s mouth that he and his lackeys took to calling Justin Trudeau a back-stabbing, hell-bound liar. Latterly, Trump has instructed his commerce department to investigate automotive imports as a national security risk — the same process, allowed under a 56-year-old U.S. law, that resulted in the kangaroo-court decision on steel and aluminum tariffs.

Of course, this is all small potatoes compared to the U.S.-China dust-up, which heated up after China met Trump’s tariffs on US$50 billion of Chinese goods with tariffs on US$50 billion of American goods. Trump’s now threatening another US$200 billion in tariff targets if China doesn’t back down — and another US$200 billion if that still doesn’t work. So far, China is titting for every tat.

So here we are. Never mind that Trump’s obsession with the evil of trade deficits is thoroughly wrongheaded. Or that his tariffs will end up costing U.S. jobs and will be paid for by U.S. consumers. Or that he’s alienating friends (while wooing enemies).

His stupid trade war is here. The world will just have to deal withit.

For investors, this throws a whole lot of uncertainty into the late-bull-market mix. The Dow is wavering; Europe and emerging markets are selling off; Japan’s markets are stalling as the yen is soaring. By comparison, the S&P/ TSX has fared rather well, ending Tuesday only a few points off its 12-month high. Meanwhile, traditional safe havens, like government bonds, are rallying: The yield on the 10-year U.S. Treasury fell as low as 285 basis points on Tuesday.

Maybe this isn’t quite panic, and maybe it shouldn’t be. When you look at the numbers, big as they are, they aren’t that big. Let’s say there’s around US$500 billion in tariff-targeted goods, real or threatened. That amounts to around three per cent of the annual world merchandise trade, and it’s not like none of the tariffed goods will trade. But here’s the thing: While the general distribution of adverse impacts might be small, those impacts will not be evenly distributed. There will be winners and losers, relatively speaking.

The States might be among the better-insulated economies to withstand a global slowdown, since trade represents only 27 per cent of GDP. But again, pain won’t be meted out in equal portion. Consumers who have been raised on cheap Chinese goods will pay more; companies that import steel and aluminum already are. Protected steel companies might hire workers, but not as many as will be lost in steel-dependent industries. Inflation, already rebounding in the States, could mount, increasing the chances the Federal Reserve makes a policy error and tightens too aggressively.

But in the short term, stockholders in U.S. corporations might do just fine, thanks to the jolt from the Republicans’ tax cuts. Companies like Apple are already spending the windfall on stock buybacks, and the boost to their bottom lines should at least cushion the blow of a trade-induced slowdown, at least for this year and probably next, as the stimulus kicks in.

Canada, and Canadian investors, probably won’t be so lucky. We don’t have a big stimulus package to feast on, but the bigger issue is that Canada’s trade-toGDP ratio stands at 64 per cent — and about three-quarters of it is with the States. If autos get hit with tariffs, the pain will be concentrated in the manufacturing centre of Ontario. What happens if hundreds of thousands of goodpaying automotive jobs there evaporate? If Ontario’s losses spill over into the wider economy, what will happen to the housing market and the overleveraged consumer?

Those are just the proximate potential impacts of a trade war; the wider ripple effects on economic activity will be harder to measure. For instance, there’s no end of bureaucratic and regulatory ways to make doing business more difficult and expensive for foreign companies: new regulations, labour disruptions, border controls, administrative foot-dragging, paperwork, direct taxation — you name it.

The long-term legacy of an extended trade war might be even worse. After all, by levying tariffs and protecting industries, governments are really just playing that old game of picking winners and losers. They already do that, of course, but trade rules are, or have been, an important constraint. Now, if the trade war continues, a zombie horde of low-productivity, uncompetitive companies will spring up behind the gates of protectionism. It could take years to recover, even if a saviour someday rides in and restores some semblance of sanity to global trade.

For now, we’re stuck with Trump’s stupid war.