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June 22, 2018 | The Fog of a Trade War

Hilliard MacBeth

Author of "When the Bubble Bursts: Surviving the Canadian Real Estate Crash"

Media references to an all-out global trade war are spiking. China and the U.S. exchange threats almost daily, with announcements of new tariffs on a wide range of goods like steel, aluminum and soybeans that are traded internationally.

European countries are planning to impose tariffs on U.S. goods in retaliation.

Is the U.S. pushing the world into a trade war? Who will blink first?

President Trump says that “trade wars are good, and easy to win.”

But in his 1873 book “Vom Kreige” (On War) the famous Prussian military analyst Carl Von Clausewitz refers to the uncertainty of war and the difficulty of making decisions with such a high number of unknowns. He says:

“War is the realm of uncertainty; three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty. A sensitive and discriminating judgment is called for; a skilled intelligence to scent out the truth.”

— Carl von Clausewitz

 

A trade war has commenced because of the unilateral actions of the U.S., which launched punitive trade actions against many other countries, rivals and friends alike.

In such an environment, leaders are forced by public opinion to strike back to appear to be strong in the face of an external threat. To not act would be viewed as weak and would be fatal to a politician’s career.

Congressional leaders are starting to complain about the impact on their districts in meetings with Wilbur Ross, the commerce secretary. Several of them complained about the tariffs:

“We watched the soybean market start to collapse”

Ohio, a steel making region, was “hit harder than other state by the Canadian retaliatory tariffs.”

A politician from Pennsylvania complained that Kraft-Heinz might move its ketchup production to Canada.

According to this Washington Post article, all these complaints came from Republicans.

The commerce secretary brushed aside such comments, reminding people that in a war there will be casualties on both sides.

Countries like Canada, the European Union, Mexico, Russia, India, Japan and Turkey have already announced retaliatory tariffs on $40 billion of U.S.-made products. The complaints from elected U.S. politicians will continue to get louder, heading into the November election.

Canada is bracing itself for the impact of a threatened tariff on autos and auto parts after the breakdown of NAFTA talks. TD Bank economists estimate that a 10 per cent tariff on parts and a 25 per cent tariff on finished vehicles would cause job losses in Ontario of up to 160,000 jobs. Half of all U.S. cars are imported, and a quarter of all U.S. car sales are from Canada and Mexico.

U.S. Representative Kevin Cramer, a Republican from North Dakota, says that Canada should take Donald Trump seriously when he threatens new tariffs on autos.

The last global trade war was in the 1930s, when production and employment was mostly in the agricultural sector in North America. Since then trade has evolved to include most other goods and many services.

Since President Trump is acting with a political motive in launching this war, the big test will come in November, when voters can reaffirm the Republican majority in the House of Representatives and the Senate, encouraging the President to continue, or elect a Democrat majority.

Only then we will know if the world will step back from the brink of a global trade war.  Canadians can only hope that the U.S. will blink first.

Hilliard MacBeth

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances.. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

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June 22nd, 2018

Posted In: Hilliard's Weekend Notebook

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