And I don’t mean college ball (mostly because my bracket is already toast).
I mean, madness when it comes to the worsening trade relation between the world’s two largest economies. Interesting to note that 25% of the world’s GPD is generated by the USA (with only 4% of the world population) while China contributes 14% to world GDP with 20% of world population. Canada? We come in at a cute 2% of world GDP with 0.1% of the world’s population.
So, back to the madness. As many of you recall, only a few short weeks ago, Canada dodged a bullet when it secured an exemption from U.S. President Donald Trump’s hastily announced steel and aluminum tariffs but he later fired the first shots of a potential trade war yesterday by signaling his intention to reverse a quarter-century of global commerce, with 25% tariffs on US$50 billion of Chinese exports, and tougher restrictions on Chinese investment in U.S. technology, which he believes China is stealing. Beijing responded last night with plans to apply equal tariffs to about US$3 billion of U.S. exports, from dried fruit to recycled aluminum. And it may go further, targeting political darlings from aircraft (Boeing) and machinery (Caterpillar) to soybeans (Kansas) and sorghum (North Dakota).
Financial market reactions make it abundantly clear that investors do not like trade frictions. The reaction was swift, with the S&P 500 falling 2.5% and the Dow down 700 points yesterday and another 2.1% and 425 points today. The reaction demonstrates how chaotic and unpredictable trade wars can be, with collateral damage popping up in unexpected places, as protecting a steel job here can imperil a soybean job halfway across the country. Read more here.
Even though it knocked more than ~1100 points off the Dow, Trump’s action was hardly a surprise. The U.S. trade deficit with China has come to resemble the Grand Canyon—at US$337 billion, it grew 9% last year—and almost no Western politician (or economist) thinks that’s a good thing. But despite the need for greater balance, Trump is now risking an escalation he can’t control. His administration did suspend plans to impose steel and aluminum tariffs on the European Union, South Korea and a few other trading partners. He’ll need the friends. But with China, he’s now in dangerous territory, needing to identify specific trade targets within 15 days. He’ll likely have to hit big import categories like computers, electronics, footwear and electrical equipment. That would deal a blow to Xi Jinping’s strategy to create a global economic power by 2025. It would also deal a blow to Main Street U.S.A., through higher inflation and lower competitiveness. Small wonder Trump’s trade guru Peter Navarro called yesterday “historic. I’d call it March Madness.
It’s still too early to tell whether this will simply be a trade spat or turn into a more meaningful trade war but protectionism will remain in the foreground. Forward-looking indicators such as confidence measures will be a useful guide to gage the risk to economic and earnings expansion. As always, my team and I will continue to monitor the changing macro environment and potential implications for your investment portfolio – in addition to making sure that your wealth management plan is on track. If you have any questions as to how your current investment portfolio is positioned, or if would just like to chat further on the topic, please do not hesitate to call me directly any time.
Now you are in-the-know with Word on the Street.
Enjoy your weekend,