Trump Threatens Europe: "We Will Tax Your 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.

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.

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.

Comments

directaction Sat, 03/03/2018 - 13:25 Permalink

Oh, no. My beloved VWs will get more expensive.

This will cost US-name brand car buyers, too, since there'll be less competition. 

Does this include the wonderful German cars made in Mexico or the USA, too? 

 

Bes jimmy c korn Sat, 03/03/2018 - 14:01 Permalink

woohoo!

everything gets more expensive!

and more taxes!  

only a trumptard would approve.

#maga  #winning

#thankstrump

----------

ps.  the manufacturing jobs will never fucking come back until

1.  americans become the slave labor

or

2.  there is enough pork lining the pockets of the oligarchs

and not a moment fucking sooner

In reply to by jimmy c korn

Gaius Frakkin'… Bes Sat, 03/03/2018 - 14:08 Permalink

Nice copypasta Bes. So what gender pronoun do you prefer?

The fact they are attacking bluejeans shows what kind of cartoon world these globalist jews live in. America hasn't been a significant manufacturer of bluejeans for some time.

In reply to by Bes

CuttingEdge Gaius Frakkin'… Sat, 03/03/2018 - 14:18 Permalink

Steel tariffs didn't work under Bush, and are for more likely to damage US jobs as local manufacturers put their prices up to coin in on no external competition. Happens every time. Not good, but it is notable that the minute he slapped tariffs on South Korean washing machines, companies announced they were moving production to the US.

 

However, on the positive side of the ledger...

 

Watching the Germans squeal when this kind of shit happens is highly amusing. They can cry me a fucking river.

My brother's company (always run on tight margins) got seriously raped after the EU slapped a 47.7% tariff on Chinese solar panels to protect zee German manufacturers of same product. 50% staff layoffs as a direct result of it. It is no co-incidence that invariably all manufacturing and trade legislation passed by the EU tends to assist the Vaterland, irrespective of who else benefits (no matter what Ghordius may say). Something the French even now haven't cottoned on to.

In reply to by Gaius Frakkin'…

Déjà view bigkahuna Sat, 03/03/2018 - 21:15 Permalink

Talk is cheap...time for action—now!

On August 15, 1971, President Richard Nixon closed the gold window and imposed a 10 percent surcharge on all dutiable imports in an effort to force other countries to revalue their currencies against the dollar. The import surcharge was lifted four months later after the Smithsonian agreement led to new exchange rate parities.

http://www.nber.org/papers/w17749

In reply to by bigkahuna

Creative_Destruct Déjà view Sat, 03/03/2018 - 23:34 Permalink

"Investors should know that Europe has already imposed two dozen anti-dumping measures against Chinese steel exports." 

And of course add in the Bush tariffs on steel in 2000, Obama tariffs on tires, and numerous other examples.

When anyone but Trump does it, it's spun like it's a reasonable action.

When Trump does it, it's spun as though it's the action of a madman and the world is ending.

In reply to by Déjà view

css1971 Déjà view Sun, 03/04/2018 - 07:40 Permalink

Gold eliminates trade deficits.

You export gold in return for imported goods & services. Eventually you run out of gold. Either you reduce your imports, or you begin exporting goods and services, or, barter imports for exports.

Either way, you have to produce and export in order to import.

And this means :

  • You have to have a domestic manufacturing and service base.
  • The 1% can't arbitrage wage levels with China, Bangladesh.
    • Which in turn means reduced inequality domestically.

 

An unlimited currency like the USD, can simply be created on demand and exported to pay for imports.

  • There's little limit to the trade deficit.
    • No need to produce and export in order to import
      • You can export your entire manufacturing base.
        • The gains go to the owners of capital, and the losers go on welfare.

 

In reply to by Déjà view

TGDavis css1971 Sun, 03/04/2018 - 08:48 Permalink

The same thing would happen if currencies weren't manipulated.  For example, the Chinese get paid for exports in dollars. They would then go into the market to buy yuan and sell dollars. Soon the price of yuan would rise making their exports less competitive.  Dollars would fall, making US goods cheaper to the world. However, the price of foreign bought raw materials would get more expensive to US manufacturers.

In reply to by css1971

OverTheHedge beemasters Sun, 03/04/2018 - 03:07 Permalink

The EU is hugely protectionist. Could all this trade kaffuffle finally shake out with no tarrif at all, for anyone? Of course not, but it would make Brexit more interesting. 

Given that tarrifs are bad, do we think politicians will a) cut tarrifs, or b) increase them significantly? My money is on b), as all the monopoly/cartel corporations panic and buy up their politicians in a desperate flurry of backhanders and bribes. Good time to be a politician, methinks (is there ever a bad time?)

 

In reply to by beemasters

keep the basta… IH8OBAMA Sat, 03/03/2018 - 21:45 Permalink

I cannot think of any costly USA brand product I have bought except Eames computer desk and blue chair and those also could be Chinese made. Will buy USA made recycled  rubber roof tile system which withstands huge hailstones and hard weather.

iPad phone and computer are not made in the USA. Replaced mac hard drive with Samsung.

I don't see USA made things around other than mason jars and pressure cooker for bottling.

armaments and Hollywood are the obvious big ones. 

 

In reply to by IH8OBAMA

AllBentOutOfShape Bumpo Sun, 03/04/2018 - 17:34 Permalink

The US exports slave labor and dollar wages to other countries like China, Mexico, India, etc, to make iPhones, computers, shoes, clothing, etc, making billions/trillions of dollars every year, only to sell it back to those countries that made them for pennies on the dollar at top price, and Trump is wondering why these countries impose higher tariffs on U.S. products? And this doesn't take into account U.S. exports of war, weapons, and democracy. That's a whole other story.

Someone is getting fucked alright, but it's not the United States. The U.S has been doing the fucking for many decades now.

In reply to by Bumpo