It seems to be all the rage these days: Which country? What goods? and What amount? are the often asked questions these days as the world seems to be edging closer to an all-out trade war, which could easily slow down global growth and cause many economies targetted to contract. The vanguard of economic growth and prosperity of the last two decades are now at the risk of being dismantled in favor of bilateral arrangements to satisfy the demands of the Trump Administration. Whether it is based on an overwhelming sense that free trade has come at the expense of the U.S. or whether its a manifestation of the now famous “art of the deal”, threats and saber-rattling of the trade form is creating unease about the viability and longevity of global prosperity.
Disruptions to complex and intricate trade relations agreed to and acted upon for decades are not easily replaced and may take as much time to strategically dismantle or replace, while limiting the inevitable economic fallout with, of course, the best example being Brexit. What takes years to build, can’t be readily replaced without serious economic dislocation or demolished by a quick shoot-from-hip tweet. Rather, the orderly withdrawal of imposition of a tariff in any trade relation must be carefully considered before implementation. Without this, an escalating trade war becomes inevitable and well beyond the singular cause for the imposition of duties. Such is the case with Canada, who after being subject to a punishing 25% duty on steel and 10% on aluminum, working out to about $3.2 billion in tarrifs, retaliated with a bevy of tarriffs on U.S. exports to Canada. Mindful that Canada is the largest consumer of U.S. exports and had a $12.5 billion trade deficit with the U.S. in 2016, according to the Office of the United States Trade Representative, which noted that while the U.S. imported $307.6 billion in goods and services from Canada that year, the U.S. exported $320.1 billion in 2016.
When it comes to oil and other petroleum products, new markets for U.S. shale to destinations such as China are now off limits as threats and actions on a wide range of products by the Administration is now leading to retaliation in the form of shunning U.S. oil and agricultural products for which the U.S. government is now planning to provide an aid package to American farmers, the amount of which has not been seen since the Willy Nelson began his Farm Aid crusade in the 1980’s.
The dramatic imposition of duties and tariffs doesn’t just risk retaliation, it’s also a primary cause of volatility seen on the energy and index markets of late. While many traders rightly fear fallout from a full-blown trade war, it is the suppression of oil and other energy commodity prices that could cause a temporary reprieve in prices, but ultimately set the markets up for dramatically higher energy prices looking ahead. The draw on global crude spare capacity, coupled with years of oil exploration and development risks exposing a dramatic and foreseeable tightening in global supplies of crude which neither U.S. shale producers or members of OPEC or allied non-OPEC members like Russia can readily make up.
The looming threat of trade entanglements is likely to hurt us economically and at the pumps.