Trade wars: the new normal?

Jeremy Gardiner, Director at Investec Asset Management.
Jeremy Gardiner, Director at Investec Asset Management.

The International Monetary Fund (IMF) warned recently that the main risk factors to the global economy currently are that further US-China tariffs, US auto tariffs, or a no-deal Brexit could sap confidence, investment and global growth.

It warned that these trade wars needed to end urgently in order to boost confidence, investment and growth. It means, therefore, that your financial fate over the next couple of years lies largely in the hands of two people: UK Prime Minister Boris Johnson and US President Donald Trump.

A no-deal Brexit would be an event in global financial markets which would scare foreign investors and result in emerging markets, including South Africa, being punished. The UK and Europe are significant trading partners of ours; the UK is responsible for approximately a third of our foreign direct investment inflows.

Johnson does not have an easy road ahead. After taking office in July, he faced having to do in three months what Theresa May couldn’t achieve in three years. Although committed to leaving on 31 October – without a deal if necessary – Johnson realises this route carries significant risk and could be ‘bumpy’.

Ideally, he’d like to reach an agreement with the EU, but, given that the previous deal failed repeatedly in parliament, he needs a new, improved deal. However, the Europeans told May months ago that it’s not up for renegotiation, and they’re sticking to that.

So, Johnson finds himself leading a government committed to a ‘no-deal’ exit, should the Europeans refuse to negotiate a new deal (which they may well do). He is up against a parliament vehemently opposed to a ‘no-deal’ Brexit, and the Tories have a parliamentary majority of one.

This is likely to result in decision-making paralysis, followed quite possibly by a vote of no confidence and fresh UK elections. Many commentators say this is why Johnson requested the British monarch to suspend parliament over five crucial weeks in the run-up to 31 October.

Johnson will obviously be hoping for a stronger mandate, but anything, including a Labour/Lib Dem coalition victory, however unlikely, is possible. Brexit aside, I believe we’re going to have to get used to tariff wars, because that’s how Trump fights.

The Mexicans are safe (for now), India is under pressure, and Europe, particularly the automobile industry, is next. Just as markets were enjoying a pause in the conflict over the past month, Trump completely disregarding the ongoing efforts of his negotiators, implemented more tariffs, by tweet.

Investors panicked – again! – and world markets, including emerging markets (and SA), suffered. I’ve written elsewhere before that Trump has a strategy, and that analysts believe that he is deliberately stoking global tensions in order to get the Chinese to stimulate more and the US Federal Reserve (Fed) to cut more.

Then, when he eventually does a deal with the Chinese, the US economy and stock markets will crescendo, peaking just in time for the US elections. The result? A booming economy should ensure his re-election next year.

Apparently, that’s how the US works. A strong economy equals almost certain re-election for an incumbent president. It seems the economy is all that counts, all other negativity is just ‘noise’.

I’ve been told that this theory gives too much credit to Trump; that he is irrational and acts impulsively with little thought of the consequences. If that is the case, we better hold on tight because there’s a very real chance that the global economy is going into recession.

The risk to his strategy is that the Chinese understand how much he needs a strong economy for re-election and may well play hardball in order to try and strike a better deal with a Democrat president. Also, Jerome Powell, chair of the Fed, is not yielding to Trump’s pressure to accelerate rate cuts, infuriating Trump and unsettling markets.

I’m pretty sure his strategy is to get re-elected. If that is the case, and he manages to artificially stimulate the US economy (and therefore also the global economy), the result will be a ‘risk-on’ environment, which would be very positive for emerging markets, including SA.

And my goodness, at the moment we need every bit of help we can get.

Jeremy Gardiner is a director at Investec Asset Management.

This article originally appeared in the 12 September edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
I'm not really directly affected
18% - 1755 votes
I am taking a hit, but should be able to recover in the next year
23% - 2306 votes
My finances have been devastated
35% - 3453 votes
It's still too early to know what the full effect will be
25% - 2482 votes