Tom Stevenson
 

Donald Trump has fired the first shots in a US-China trade war in which the biggest losers will almost certainly be his own supporters. During the opening skirmishes he will no doubt continue to ride a wave of anti-China sentiment that is perhaps the only topic on which Americans are united. But as the real economic impact at home becomes clear, his America First protectionism will look increasingly reckless.

The imposition of tariffs on $34bn of imports from China is small beer at this stage. They represent about an eighth of China’s exports to the US. The President has made it clear, however, that this is an opening salvo. He has all $500bn of Chinese imports in his sights. Add in the threats he has levelled at his so-called allies in Europe and Canada and the potential for a $1trn trade war is clear to see. 

Trade represents about half of global GDP and it has grown by around 40pc in the past decade. It is the bedrock of prosperity in the modern world and, contrary to what Mr Trump has claimed, America has been one of the major beneficiaries of open markets and relatively frictionless trade. Exports in the past four years have topped $6trn, according to John Kasich, the Republican governor of Ohio, a key manufacturing state. Millions of US jobs depend on cheap imports and the ability of American businesses to sell their wares abroad.

All of this is now threatened by a President who is using trade as a weapon in a bigger, and much more dangerous confrontation. Bank of America Merrill Lynch said in a recent note that the US is on a collision course with China which it increasingly views as a ‘strategic adversary’. This is a battle for ‘global influence, values and wealth’, as the President himself said in a speech on national security strategy last December.

The US has been engaged in geo-political rivalries and economic competition for the whole of the post-war period. For 40 years from the 1940s until the 1980s it was locked in an ideological battle with the USSR. That was followed by bitter economic rivalry with Japan in the 1980s. What is different about the conflict with China is that it combines both of these battles in one. As the Economist put it recently, ‘both threats rolled into one - and twice as big.’

Few would disagree that China’s rampant mercantilism needs to be countered. But stepping back from the global rules-based trade system is not the way to achieve a more level-playing field. Abandoning powerful counterweights to Chinese influence like the Trans-Pacific Partnership and the Nafta free trade area with Canada and Mexico, while at the same time making enemies of America’s friends, is diplomatic and political idiocy. Worse, it makes no economic sense.

Mark Carney said last week that the US would be harder hit than anyone else by the President’s protectionist measures. He predicts a 5pc hit to US growth, twice as much as any other country will experience. He is right to worry about a snap back in interest rates, rising risk aversion, falling investment and tighter financial conditions.

Donald Trump won’t be remotely troubled by any of this. What he should be concerned about, however, is the domestic political backlash when it becomes clear what his policies are doing to America’s manufacturing and agricultural heartlands. These are the areas, let’s not forget, that swept him to power in 2016.

One of those places is Clyde, Ohio which the Washington Post visited recently to write a coruscating analysis of the impact of protectionist policies (implemented by Trump but also by the Obama administration before him) on one humble corner of American manufacturing - washing machines.

The battle between Whirlpool and Maytag in the blue corner and LG and Samsung in the red over the past decade illustrates how tariffs and other forms of interference can backfire to hurt the very companies, workers and consumers they are designed to protect.

A decade ago Whirlpool and Maytag merged, grabbing 50pc of the US washing machine market in the process. The deal was approved because of the perceived threat from Korean rivals which were seen to be unfairly dumping machines on the US market on the back of unfair subsidies from their government. In response, first the Obama White House and then Trump imposed tariffs. Initially, these were on Korean manufacturers and then when they simply moved production to China and then Vietnam and Thailand a worldwide import tax was levied.

As the Americans cranked up the pressure on LG and Samsung, the companies took the only path left to tapping the huge American market. They started manufacturing washing machines in America. This, of course, was heralded as a victory for American workers and consumers.

Unfortunately the victory is Pyrrhic for three reasons: first, the factories were built on the back of generous tax reliefs and grants that look remarkably similar to the state aid the Americans were railing against 10 years ago; second, after years of flat prices, American washing machines shot up in price by 17pc this spring as Trump’s steel tariffs threatened to raise the cost of the industry’s key input; and third, the new jobs are already under threat thanks to washing machines appearing high on the list of products being earmarked for retaliatory tariffs by Canada and Europe.

Washing machines, Harley Davidson motor-cycles, soy beans - the list is growing ever longer of areas in which workers and consumers may start to wonder whether they should be careful what they wished for.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

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