Tags: mexico | german | trade | war | trump | investors

Auto Tariffs Threaten to Ignite Authentic Economic 'Trade War'

Auto Tariffs Threaten to Ignite Authentic Economic 'Trade War'

Monday, 02 July 2018 10:02 AM Current | Bio | Archive

President Donald Trump recently told Fox News: “The European Union is possibly as bad as China, only smaller. They send a Mercedes in, we can't send our cars in. Look what they do to our farmers. They don't want our farm products. Now in all fairness they have their farmers... But we don't protect ours and they protect theirs.”

On Sunday, the Financial Times wrote: “Donald Trump’s threat to hit car imports with punitive tariffs risks sparking global retaliation against as much as $300 billion of U.S. products, Brussels has warned. The warning is the first time that the European Commission, in a written submission to the U.S. Department of Commerce seen by the Financial Times, has set out a detailed response to Mr. Trump’s threat to slam punitive tariffs on imported vehicles.”

Now, the European Union’s threat to tax $300 billion on U.S. exports, which is around a fifth of what the U.S. exports to the world if the United States were to impose taxes on US consumption of European autos and auto parts. Several car makers in the United States are saying that taxing auto parts would lead to reduced investment and job losses in the U.S.

Something of this scale would justify the use of the term “trade war” as this would, in all probability, reduce global real trade as a share of GDP.

The fact that American car manufacturers are urging President Trump not to tax (impose tariffs) U.S. consumers any further is an indication of the complexity of trade and why tariffs are a 19th century policy tool that doesn’t work in the 21st century world of long and involved supply chains.

For investors it is worth reiterating that trade protection will hurt the equity market more than it will hurt the economy.

Mexico Election

Andres Manuel Lopez Obrador was elected as Mexico’s first left-wing president in recent times. The earliest figures announced by the electoral board gave Lopez Obrador 53 percent of the vote. Ricardo Anaya, leader of a right-left coalition, had about 22 percent and Jose Antonio Meade, the candidate of the incumbent PRI party, took 16 percent.

The win of the anti-establishment candidate Obrador was expected by investors and financial markets have seen the Mexican peso rise slightly.

The question now is whether the President elect will secure a majority in Congress, something that hasn’t happened in over two decades.

President Trump has tweeted: “Congratulations to Andres Manuel Lopez Obrador on becoming the next President of Mexico. I look very much forward to working with him. There is much to be done that will benefit both the United States and Mexico!”

German Politics

Meanwhile, politics is back in the Euro area. Last week’s European Union bailout package for Germany may not have worked in spite of Greece agreeing to help. German Chancellor Merkel is facing ongoing descent within the governing German coalition. The junior partner, the Bavarian Christian Social Union (CSU) is still upset about immigration issues in spite of the hasty attempt by the European Union Heads of Government to offer an emergency set of measures to get the German Government out of its difficulties at last week’s Heads of Government Summit in Brussels.

Joint talks between Merkel’s CDU and the CSU are expected to be held today. The CSU leader has apparently offered to resign from the cabinet.

EU and US economic data

In data today, we already got the final data of the IHS Markit Eurozone Manufacturing PMI that fell to an 18-month low in June at 54.8.  Output and new order growth have both eased sharply since the end of 2017. In June, the rates of expansion in production and new business were the weakest since November 2016 and August 2016 respectively.

Chris Williamson, Chief Business Economist at IHS Markit commented: “The biggest concern is the extent to which export order book growth has cooled since the start of the year and could soon go into decline. The survey reveals mounting worries from companies relating to the impact of tariffs and trade wars, suggesting firms are bracing themselves for the potential for further export losses.

U.S. manufacturing expanded more than forecast last month as a gauge of supplier-delivery times shot up amid robust orders and production, data from the Institute for Supply Management showed on Monday.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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For investors it is worth reiterating that trade protection will hurt the equity market more than it will hurt the economy.
mexico, german, trade, war, trump, investors
Monday, 02 July 2018 10:02 AM
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