Trump Threatens Europe: “We Will Apply A Retaliatory Tax On Their Cars”

 

This is how trade wars escalate: Trump hasn’t even officially announced the steel and aluminum import tariffs, expected to be formally unveiled this coming week, and the rhetoric is already one of World Trade War I doom and gloom.

Hours after Trump tweeted on Friday morning that “trade wars are good, and easy to win,” European Commission President Jean-Claude Juncker said the bloc is prepared to respond quickly and forcefully by targeting imports of Harley-Davidson motorbikes, Levi Strauss & Co. jeans and bourbon whiskey from the U.S.

According to some, the preliminary EU retaliation was targeted in a way that would maximize political pressure on American leaders: Harley-Davidson is based in House Speaker Paul Ryan’s home state of Wisconsin, while bourbon whiskey hails from the state of Senate Majority Leader Mitch McConnell. San Francisco-based Levi Strauss is headquartered in House Minority Leader’s Nancy Pelosi’s district.

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As Bloomberg noted, Juncker’s threat heightened the prospects of a global free-for-all, as the World Trade Organization said the potential of escalating tensions “is real” and the International Monetary Fund warned the restrictions would likely damage the U.S. and global economy. It also prompted speculation that in light of the widespread condemnation by US trading partners and allies, that Trump might step back and reconsider the sanctions.  This in turn led to a late-day burst in the stock market.

That however appears unlikely: first, in a tweet Friday morning, Trump doubled-down and warned of more trade actions ahead, casting them as reciprocal taxes, a term he has used for imposing levies on imports from countries that charge higher duties on U.S. goods than the U.S. currently charges.

“We will soon be starting RECIPROCAL TAXES so that we will charge the same thing as they charge us. $800 Billion Trade Deficit-have no choice!” Trump said in the tweet.

* * *

On Saturday, Trump’s resolve appears only to be hardened. For one, Trump’s newly reincarnated foreign trade advisor said that the tariffs will likely be signed early next week. On Friday, Navarro also made clear that there wouldn’t be any exemptions, for either Canada or other US allies:

“I don’t believe any country in the world is going to retaliate for the simple reason we are the most lucrative and biggest market in the world,” Navarro told Fox News Friday. “They know they’re cheating us. All we’re doing is standing up for ourselves.”

One look at the record US trade deficit, with both the entire world, and with just Europe, and one could make the case that he is correct.

And then, just to underscore that the market’s late Friday assumption that Trump may change his mind on trade wars may have been woefully premature, on Saturday trump unleashed a pair of tweets making it clear that he not only has no intention of backing down, but is already planning counter-retaliation to Europe’s retaliation.

In the first of two tweets, trump blasted that “the United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!”

More importantly, Trump followed that tweet with an explicit threat aimed at Europe, saying that “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!”

And yes, the trade imbalance is indeed big: in fact it has never been bigger.

https://www.zerohedge.com/sites/default/files/inline-images/2018-03-03.jpg?itok=gqPAUo8p

Of course, that’s just how the EU likes it, and once Trump counter-retaliates to Europe’s retaliation, it will be Europe’s turn next to retaliate once again, eventually resulting in the tit-for-tat “prisoner’s dilemma” constant defection game taught in every Poli Sci 101 class, which also happens to be the worst possible outcome.

Incidentally, while many have been quick to slam Trump’s strategy, at least one hedge fund believes that Trump is correct in his trade war stance. Here is Stephen Jen from SLJ Macro Partners:

  1. The US is the least protectionist large economy in the world, while China is the most protectionist. In our note on this subject a couple of weeks ago, we pointed out that the US, based on data from the WTO, is by far the least protectionist nation in the world (with the exception of a tariff-free city state like Hong Kong) — far more open than Europe, Japan, and especially China. And it seems a bit hypocritical to us that more protectionist nations are complaining about the actions of the least protectionist nation.
  2. Excess capacity in China. China has half of the world’s steel production capacity, much of which is excessive and unnecessary, even Beijing would admit. The 2008-09 RMB4 trillion stimulus in China further boosted China’s industrial capacity, including in steel and other sunset industries. This has led to a situation where Chinese steel production had to be exported to the rest of the world at very low prices. Some in the US, not surprisingly, consider this ‘dumping’. Further, both the US and the EU share the verdict that China is still not a ‘market-based’ economy, because of the large and persistent explicit and implicit government subsidies, and other forms of support from the public sector, that make Chinese products unfairly competitive.
  3. Why is Europe not held to the same standard as the US? Europe is complaining about the US’ latest policy. Investors should know that Europe has already imposed two dozen anti-dumping measures against Chinese steel exports. What then is the substantive difference between the anti-dumping measures imposed by the EU and what the Trump Administration is doing? Is Europe less protectionist than the US? If Europe were so open, what is all the fuss about Brexit and the inability of the UK to access the European market?

So what happens if over the next week a trade war officially breaks out? The answer will depend on how US trading partners such as China, Canada and the EU retaliate, but one thing is clear: as GMO’s Ben Inker wrote on Friday afternoon, for risk-assets this could be the start of a 40% (or more) crash in stocks:

Trade Wars are Bad, and Nobody Wins

Yesterday’s announcement by President Trump of imminent tariffs on steel and aluminum imports was taken poorly by global stock markets. Perhaps in an attempt to convince investors this was an incorrect response, early this morning he tweeted that “trade wars are good, and easy to win.” He is wrong, and beyond the simple fact of his wrongness, a trade war is probably more dangerous for investors at this time than at any other time in recent history given the implications it would have for inflation, monetary policy, and economic growth. The only positive from the tariffs is that it is a windfall profit increase for U.S. producers of steel and aluminum, which is at least positive for them. It is unlikely to cause any material increase in U.S. capacity to produce steel and aluminum and therefore unlikely to lead to many additional jobs even in those sectors. The negatives are much more significant. I believe these tariffs on their own will push inflation higher, and higher inflation is a threat to the valuations of more or less all financial assets today. But the greater threat is that this escalates into an actual trade war. A trade war would increase prices on a much broader array of goods and services, while simultaneously depressing aggregate global demand. This pushes us in the direction of not just inflation but stagflation, where both valuations and corporate cash flow would be under pressure. While there are scenarios that would be worse for financial markets—the proverbial asteroid on a collision path with Earth comes to mind—a trade war has the potential to be very bad for both the global economy and investor portfolios.

As I wrote about last December, a significant inflation problem might well be the worst thing that could happen to a balanced portfolio, leading to losses on the order of 40%. A global trade war would be exactly the kind of economic event that could foreseeably lead to losses of that magnitude.

Trade Wars are Bad

As a general rule, when you add “war” to your description of an event, it’s a pretty strong suggestion that it is unlikely to be either good or easy. Wars are sometimes well intentioned (the war on drugs), occasionally necessary (World War II), but seldom good and more or less never easy to win. Even if you do “win” easily, the longer term implications are often more problematic than you thought (the second Iraq War). There is still some time for this particular war to be averted. But while it is our general contention that equity markets tend to overreact to political and economic events, this is not one of those times.

 

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13 Comments
MrLiberty
MrLiberty
March 3, 2018 4:37 pm

“When goods don’t cross borders, soldiers will.”
– Originally attributed to Fredrich Bastiat, but most likely Otto T. Mallery.

Whoever said it, is right on the money. Why is this guy going out of his way to piss everyone off, just to buy favor with a handful of crony capitalists that can’t manage to survive on their own??

starfcker
starfcker
  MrLiberty
March 3, 2018 10:45 pm

Yeah, like somebody’s really going to attack us. Worrying about what some dead guy said sometime in the past really doesn’t hold a lot of weight. And how does it help us solve anything? Bastiat might have been smart in his time, what the fuck do could he have known about trillion-dollar trade deficits? And what might he have propose we do about them. If quoting dead people is what passes for intelligence around here, the median IQ is lower than I thought

Anonymous
Anonymous
  starfcker
March 4, 2018 10:04 am

Simply put, Bastiat’s times were not our times.

Different rules now, different analysis needed.

Mad as hell
Mad as hell
  MrLiberty
March 4, 2018 12:57 pm

Because, that is what WE elected him to do! The more people he pisses off, the more I like him. When everyone gets along, you can bet they are all screwing YOU. Kind of the same logic if you are at a poker table, and don’t know who the mark is, you are probably it.
We have ALL the advantage, if we would just as a country get our collective sheeple heads out of our asses, and do more things like this. We need to tell the world to stop this “free trade” crap. Do you want more Detroits? When you don’t piss people off, you get ghettos, opioid addicted adults, crooks in Washington etc. Do you think the founders of this country would have created a sovereign nation by just talking and not pissing off the British monarchy?
Change ONLY happens when you piss off the people USING and ABUSING you. You piss off the school bully when you punch him in the face that day YOU decide this is the last day he will steal your lunch money. You piss off the burglar when you shoot his ass as he is sneaking in your window to steal your stuff…
You want to know what will make goods more expensive? The Fed, and it has already happened. “free trade” has just disguised the theft through slavery of other countries citizens, and the dumbing down of products so you don’t have to feel bad about polluting other people’s backyards. While people that don’t want to rock the boat have sat by not being pissed off, these “free marketers” have convinced you that YOU are somehow benefiting from having your buying power stolen, and being forced to purchase inferior junk built by slave labor. Please, please, please get your head out of your ASS, and see the real enemy, and above all else, please GET PISSED OFF, then maybe if enough of us get pissed, we will all start forcing change.

factual
factual
March 3, 2018 4:55 pm

The increase in Federal and State debt has everything to do with less jobs which in turn creates leas taxable revenue.
The unemployment rate is actually in the mid to upper teens, as the number of Americans who have dropped from the work force has reached record highs.
You say it doesn’t matter. Just wait until the dollar crashes and then you will see real inflation! Just wait when the debt interest takes so much $$$ out of gvt revenues that there is little left for any gvt programs!
Prez Trump knows these economic nightmares are fast approaching and needs to act to preven the collapse of AmericA.
You think he is doing this to be mean? Give your head a shake!
All these countries cheat to make their products more affordable than American made!
Time to have fair trade!

Westcoastdeplorable
Westcoastdeplorable
  factual
March 3, 2018 11:06 pm

Absolutely! MAGA!

prusmc
prusmc
  Westcoastdeplorable
March 4, 2018 7:16 am

America was great, is still great and will be even greater for those who work at Federal, State and loval government.

Anonymous
Anonymous
  factual
March 4, 2018 10:06 am

How do you account for increasing revenues and some surpluses as well?

Crawfisher
Crawfisher
March 3, 2018 5:17 pm

From what I read in the past, ALCOA invested $11 billion in a huge Saudi plant, shut down lots of their US and Canadian smelters. I don’t think aluminium capacity is coming back to the US due to energy cost. Big steel mills needs to upgrade and modernize, hope they make decisions to do so. Of course they can all borrow more money, pay bonuses and dividends, and wind up worse off.

MrLiberty
MrLiberty
  Crawfisher
March 3, 2018 11:07 pm

Why would they. That is the very purpose of tariffs….to keep US companies from HAVING to modernize. Big STEEL has been sucking at the teat of the tariff monster for decades and decades and hasn’t done a DAMN THING to improve their condition….but why bother when you have the government protecting you?

Roberto de Medici
Roberto de Medici
March 3, 2018 8:46 pm

WITHOUT ANY OTHER REASON, THE AMOUNT OF MONEY WE GIVE THESE COUNTRIES MAKES ME FEEL THAT THE US DESERVES A LEVEL PLAYING GROUND.
WHAT EVER TRUMP CAN DO TO LEVEL THE PLAYING FIELD I’M FOR.
CHANGE THE TARIFFS, OR WASTE LESS “GIFT” MONEY

SORRY FOR THE TYPE HAVE VISION PROBLEM AND CAN’T READ SMALL CASE

Coalclinker
Coalclinker
March 3, 2018 10:49 pm

The Europeans and everyone else are threatening to put tariffs on Bourbon whiskey? Good! Maybe we’ll be able to buy 100 proof Maker’s Mark Gold Label Sour Mash Whiskey again. I live in Kentucky and it has gotten expensive and harder to find here but the Japanese can buy all of it they want.

ZeroZee0
ZeroZee0
  Coalclinker
March 4, 2018 9:18 am

Unfortunately it will probably increase the cost of MY personal favorite, The Macallan 18 year old Scotch…….