From Deutsche Bank’s Macro Strategist, Alan Ruskin
Two peas in the same pod: Tariffs and weak USD policy
President Trump’s proposed steel tariff is leading to some strange contradictions.
I) With widespread reports that the President has ignored the advice of leading advisors like Gary Cohn, it has become rational for those who believe in free trade to wish for a sharp decline in the stock market, as something the President may listen to on this issue. In light of the above, here is another ironic piece of ‘good news’ – the Administration’s timing seems poor. This is falling on an equity market that has already looked vulnerable, concerned with the Fed’s response to inflation pressures, and an ‘unusual’ late cycle fiscal stimulus. Risky assets are genuinely vulnerable, and again might speak to the White House against ideas of a trade war that is ‘easy’ to win.
2) Very few observers expected the opening gambit on a trade war to be such a blunt weapon that hurts some of the US’s long standing allies with free trade credentials, like Canada, more than it directly impacts countries where trade imbalances are stark like China. (Note the indirect impact on China is much larger than China’s modest steel exports to the US, given China dominates global steel supply). The good news here, is the national security arguments are difficult to defend, and the Administration has caused such a stir, there is more chance of long standing US allies, and indeed the US business community, getting through to the White House, than an action which directly targeted China alone.
3) Protectionism will create such a brouhaha, it is going to very hard for the President to hold onto these mooted tariffs, while a retreat to something that better fits ‘reciprocal trade’ is more plausible. The market response highlights how much more effective it is to use the exchange rate to quietly manipulate the relative price of trade and non-tradables. This is not recommended, as it represents an alternative ‘race to the bottom’, that undermines the price of US assets (bonds and equities), but it does highlight the extent to which mercantilist vision can view a weak USD policy, and tariffs/protectionism, as peas in the same pod. Certainly it fits with a world that believes the US has a weak USD policy.
Which brings us to the last irony. Protectionism will be at its most effective on trade, only in so much as it will help deliver a weaker USD, albeit at significant cost to US assets.