Investors and economists alike were watching the clock last week.
Last Friday, the US imposed tariffs on US$34 billion of Chinese imports. Another US$16 billion could follow if China retaliates…and another US$200 billion if China hits back…and another US$300 billion…
That is a total of US$500 billion in tariffs.
To give you an idea of the size of these tariffs, according to the US Census Bureau, US imports from China last year were about US$505 billion.
China struck back and has accused the US of launching ‘the largest trade war in economic history’.
While many may not be ready to admit it yet, we are pretty much in a trade war already.
So far they’ve been targeting tariffs in an effort to get negotiating leverage.
And the negotiating tactic could be starting to work…on Germany.
US imposes tariffs on vehicles from the EU
As you may remember, the US recently imposed steel and aluminium tariffs on trading partners Mexico, Canada and the European Union (EU).
The US has also threatened to impose 20% tariffs on vehicles coming from the EU.
As we told you before, European vehicles and auto parts are one of the big-ticket items. EU car exports to the US are almost six times higher than EU imports from the US.
As Reuters recently reported:
‘German Chancellor Angela Merkel said on Thursday she would back a lowering of EU tariffs on U.S. car imports, responding to an offer from Washington to abandon threats to impose levies on European cars in return for concessions.
‘“When we want to negotiate tariffs, on cars for example, we need a common European position and we are still working on it,” Merkel said. “I would be ready to support negotiations on reducing tariffs but we would not be able to do this only with the U.S.”’
The US is relying on the economy to stay strong to get some leeway to renegotiate trade deals. Especially since workers and businesses recently received a tax cut.
The job market looks strong.
The most recent US jobs report, released last Friday, showed strong employment growth. The US economy added 213,000 jobs in June. That is 18,000 more than expected.
Much of the labour growth was in business services, manufacturing and health care.
Yet salaries only increased by 2.7%. And while the job market looks strong, it may very well be that salaries stay put for a while longer.
Labour force participation rates are still below the 2008 level, as you can see in the graph below. So more people could be looking to enter the workforce.
Source: US Department of Labor
And while the official unemployment rate (see graph below red line) is low, there is a high number of workers who are working part-time but would like to be working full time (blue line).
Source: US Department of Labor
Salaries are barely growing, but inflation is ticking up.
There are higher oil prices. More expensive goods from a trade war could affect consumer spending and corporate earnings.
Could we see a full trade war?
So far tariffs have all been a game of who blinks first. But if no one blinks, things could easily get out of hand, and send us into a full trade war.
And a full trade war could definitely threaten our fragile recovery.
10 years after the global crisis, we are still heavily indebted. Long term low interest rates may have given us some breathing room, but they’ve also ballooned asset prices like property and stock market investments.
Now interest rates are starting to rise.
As the Bank of International Settlements said in their recent annual report:
‘In some respects, the risks mirror the unbalanced post-crisis recovery and its excessive reliance on monetary policy. Where financial vulnerabilities exist, they have been building up, in their usual gradual and persistent way. More generally, financial markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates…
‘One possible trigger of an economic slowdown or downturn could be an escalation of protectionist measures. Its impact could be very significant, if such escalation was seen as threatening the open multilateral trading system.’
A full-blown trade war could very well be the thing that sends us into recession.
Editor, Markets & Money
PS: Author and economist Harry Dent thinks the next economic upheaval is at our doorstep…and has a chilling warning for Australia. If you want to hear more about Harry’s predictions click here.