Chief economist update: Trump's beggar thy neighbour policy

Another month, another strong US labour market report. The time before US President Donald Trump would have had consumers, businesses and investors everywhere dancing in the streets and singing hallelujah.

This is due to the rationale that the US economy's revving engines would haul the rest of us up into a better place. Not this time though, for this time, it appears that the stronger America's economy grows the more determined Trump becomes in trade-warring with its neighbours.

But first the stats. US non-farm payrolls increased by 201,000 in the month of August with the unemployment rate unchanged at 3.9% - just a tick above the 18-year low recorded in May this year. Although the strength of employment in August is somewhat offset by the downward revisions in June and July (a total 50K reduction for the prior two months) and the unemployment rate disappointed expectations for a lower 3.8% print, annual average hourly earnings growth accelerated to 2.9% in August versus 2.7% in July and expectations of 2.8%.

This points to rising wage inflation and all but confirms the third of the four Fed rate hikes expected for 2018 when the FOMC concludes its 25-26 September meeting.

Trump wouldn't be "thrilled". Just as he was upset by the latest stats on America's international trade (released 5 September) - which I suspect was a major factor for Trump beating his trade war drum louder last week.

Now that the "public comment" period is over, Trump is expected to impose tariffs on US$200 billion worth of Chinese imports and later threatened to tax another US$267 billion of goods coming from China. This would certainly prompt retaliation from China in equal measure.

The Sino-American tit-for-tat is the public face of the trade war but there's also battles being waged against Canada and Mexico (NAFTA) and more recently, Trump has been reported to be setting his crosshairs on Japan (then back to Europe?).

America's stronger growth relative to the rest of the world makes it hardly surprising that its consumers and businesses would be buying more especially with the strength of the US dollar making imports cheaper.

The US trade deficit jumped to US$50.1 billion in July from US$45.7 in June. This is the widest deficit in five months as total exports fell 1% over the month (that followed a 0.7% decline in June) and imports increased by 0.9% in July (after rising by 0.7% in June) to its highest level on record US$261.2 billion.

The bilateral trade deficit with China increased 10% to a record US$ 36.8 billion in July; the deficit with the European Union jumped by 50% to a record of US$17.6 billion; the deficit increased by 2.9% to US$5.5 billion with Japan; by 57.6% to US$3.2 billion with Canada; but dropped by 25.3% to US$5.5 billion with Mexico.

It's not hard to expect that Trump would be "dealing" harder and louder on trade tariffs. The problem is, the harder Trump goes on trade (and compounded by the strong US dollar) the greater the downward pull on the growth of America's neighbours, making it harder for them to lift their purchases of "made in USA" products even if they wanted to.

Last week's drop in equity markets (including Wall Street) show that Trump's "beggar thy neighbour" policy could be starting to also beggar America.

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.

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