Chief economist update: Trump spoils for war

"You're going to have protection for the first time in a long time."

For better or worse, US President Donald Trump continues to deliver on his campaign promises.

Wall Street took Trump's latest promise fulfilment as an excuse to take profits. The Dow fell by 1.7% and S&P 500 by 1.3% overnight after Donald announced that "sometime next week, we'll be signing" the imposition of a 25% tariff on steel imports and 10% for imports of aluminium.

Yes Virginia, it's an excuse to sell. For in the words of that other Donald - Donald Rumsfeld - it's a known known.

Before he was POTUS, Trump promised that: "A Trump Administration will also ensure that we start using American steel for American infrastructure." Soon after his inauguration he went to work. reported on 20 April 2017 that: "Today, President Donald J. Trump signed a presidential memorandum calling on Secretary Wilbur Ross to prioritise a Department of Commerce investigation initiated last night into the effects of steel imports on US national security."

This, a week later (27 April 2017): "Today, President Donald J. Trump signed a presidential memorandum calling on Secretary Wilbur Ross to prioritise a Department of Commerce investigation to the effects of aluminium imports on US national security."

National security? When did steel and aluminium enlisted as mad-bombing terrorists?

But I digress. The writing's long been on the wall.

It might be an excuse to sell for now but if the imposition of tariffs on steel and aluminium spirals into a world war on trade, it would be a justifiable reason of concern for Wall Street.

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Already, America's major trading "partners" are fighting back: "Should restrictions be imposed on Canadian steel and aluminium products, Canada will take responsive measures to defend its trade interests and workers," Canadian Minister of Foreign Affairs, Christia Freeland said.

"We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk...The EU will react firmly and commensurately to defend our interests," President of the European Commission, Jean-Claude Juncker said.

China still has to officially respond but only two weeks ago, Wang Hejun - chief of the trade remedy and investigation bureau at China's Ministry of Commerce - warned that "if the final decision [on steel and aluminium tariffs] impacts China's interests, China will certainly take necessary measures to protect its own rights."

Trade war, here we come! And war of whatever nature - bow and arrows, nuclear, currency and trade. But - as the song goes - war is good for absolutely nothing.

Case in point. To aid the US economy out of the 1930's Depression, the government enacted the Smoot-Hawley Tariff Act on 17 June 1930. It increased the tariffs on US imports from 25.9% to 50%.

What did this produce? Retaliatory tariffs on US imports from other countries. While beggaring its neighbours, America also beggared itself.

US imports dropped by 66% between 1929 and 1933 and its exports plunged by 61%. Ouch! We all know what happened thereafter - the depression deepened. The US unemployment rate jumped from 7.8% in 1930 to 25.1% three years later.

For sure, the world is in a much better place now than in the 1930's - it's in a synchronised global growth upswing.

However, this would all be undone once the missiles of the world trade war starts flying.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

His latest book, The Good Economics Guide: Making sense of key economic data, is available free to download on the Financial Standard app.

Read more: TradeAmericaWall StreetDepartment of CommerceSecretary Wilbur RossCanadaCanadian Minister of Foreign AffairsChristia FreelandEuropean Commission ChinaJean-Claude JunckerMinistry of CommerceUS President Donald TrumpWang Hejun
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