Chief economist update: Friday when the trade war began

Shots fired! Shots fired! The threat of a trade war became real on 6 July 2018, when at exactly 12:01 am (NY time), the US imposed a 25% tariff on US$34 billion of Chinese imports to which China immediately responded with a percent-for-percent and dollar-for-dollar border tax of its own on "Made in the USA" produce.

This is just for starters. More's on the way. In two weeks' time, the US will implement tariffs on an additional US$16 billion worth of imports from China that would certainly be matched by Beijing, spurring Trump to make good on his threat to tax another US$500 billion worth of Chinese imports.

To put this in perspective, US$500 billion could buy you Belgium plus some change. And this is just with America's war with China, there's still the European Union, Canada, Mexico and Japan.

The history and numerous studies on the repercussions of a global trade war have only one conclusion, it's good for absolutely nothing - it lessens trade and diminishes economic growth while at the same time pushing inflation higher.

But if the escalation of a trade war is so grim, why have equities rallied on the day the war began? The commentariat puts this down to "buying the rumour, selling the news" or that financial markets have already factored in the opening salvo on the war on trade.

Perhaps. Or it could also be that financial markets took comfort in another solid US employment report - non-farm payrolls increased by a much higher than expected 213,000 in June - without a corresponding increase in wages - average hourly earnings grew by a less than expected 2.7% - suggesting a less aggressive Fed.

Still another is that many still don't believe that a global trade war would ensue and that these initial actions are merely Trump's posturing to bolster his position at the negotiating table while at the same time, appear to be looking at the welfare on Americans one and all.

Trump had been derided for making spelling mistakes in his tweets (as we all are prone to) but he certainly knows how to read. He knows and understands the consequences of an all-out trade war, and if not, his advisers would have told him what these are.

Recent studies showed that the US economy could slow by between 1% and 2% if the current ructions escalate into a full-blown trade war. There goes Trump's "So we're at 3.3% GDP [Q3 2017]. I see no reason why we don't go to 4%, 5%, and even 6%."

POTUS certainly would have read the US Chamber of Commerce's warning back in May this year that, "President Trump's strict stance on trade could put 2.6 million American jobs at risk". (CNN Money).

It may not come to that for it looks like Trump's getting results. Reuters reports German Chancellor Angela Merkel saying that "she would back a lowering of European Union levies on imports of US cars". "The United States currently imposes a 2.5% tariff on imported passenger cars from the EU and a 25% tariff on imported pickup trucks. The EU imposes a 10% tariff on imported US cars."

This would further bolster Trump's bargaining position when he re-negotiates trade with its NAFTA partners Canada and Mexico.

By firing at the second biggest economy in the world, the rest will have to take notice ... and comply.

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.

Read more: EUAmericaChinaCanadaEuropean UnionMexicoNYU.S.AmericansBeijingBelgiumCNN MoneyFedFridayGerman Chancellor Angela MerkelJapanMadeNAFTAPresident TrumpReutersUnited StatesUS Chamber of Commerce
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