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'Threaten, Tweet, Retreat': Trump Trade War Seems Unlikely in Reality

'Threaten, Tweet, Retreat': Trump Trade War Seems Unlikely in Reality

Thursday, 24 May 2018 11:15 AM Current | Bio | Archive

U.S. Trade and Tariffs

The Trump administration has launched a national security investigation into car and truck imports that could lead to new U.S. tariffs (taxes) similar to those imposed on imported steel and aluminum in March.

The governments of Japan, China and South Korea already said they would monitor the situation, while Beijing, which is considering the United States as a potential market for its cars, added that it would defend its interests.

If it comes through, Americans who intend to buy cars and trucks that are not made in the United States should pay tariffs. This anti-trade measure might be more concerning were it not for the precedent we have from China.

“Threaten, tweet, retreat” seems to be the general thrust of trade policy from the United States at the moment.

If the substance of the world trade order does not change, then an aggressive spin doesn’t really matter in economic terms.

A trade war, policies which cause trade volumes to grow more slowly that real GDP seems relatively unlikely.

Federal Reserve

The Minutes of the Federal Reserve meeting that took place on May 1-2 were consistent with the idea of the U.S. central bank remaining happy to keep tightening at a steady pace.

A June rate hike at the FOMC meeting on June 12-13, which will come with a summary of economic projections and a press conference by the Chair, seems entirely plausible given the language of the Minutes.

It’s interesting to see how some commentators got excited about the idea the Fed may allow inflation to rise a little above its target, notwithstanding this is hardly new information.

The Fed is unlikely to come down with full force on a modest increase in inflation above what remains anyway still a “vague” target. Besides that, it hardly matters for inflation expectations.

Emerging Markets - Turkey

The central bank of Turkey raised one interest rate by 3 percent. Maybe, it’s worth pointing out that no major central bank has an interest rate with a 3 percent level, far less would be to consider changing an interest rate by 3 percent.

The reason of course has been the rather rapid decline in the value of the Turkish lira. The Turkish lira has subsequently staged yesterday (Wednesday) a so-called “dramatic” rally, strengthening against the dollar to the level it held around lunchtime on Tuesday (!).

To the extent that policy tightening stops credit fueled growth, and in doing so reverses some of the Turkish current account deficit, a tighten of central bank policy would be helpful for the Turkish lira. The problem with raising rates simply to attract capital inflows into Turkey, in order to fund the “existing” current account deficit is that the current position is not generally considered sustainable and there are additional risks that may deter investors, independent of any return that interest rates may offer.

The New Italian Government

In the meantime, in Italy, Italian President Mattarella has asked lawyer and academic Giuseppe Ponte to form a government that will essentially define its policies as being “against” certain things.

The Prime Minister designate has sought to reassure financial markets by mentioning Italy’s position in Europe. The difficult part is to form a government that is not received as being terribly pro-European.

Investors should have most of this information priced in to the asset markets by now, but there is the chance of new information as the names of Ministers are announced and as the details of policy priorities come forward.

The prospective of the new government’s rather small Senate majority may constrain any radical policy proposals.

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

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A trade war, policies which cause trade volumes to grow more slowly that real GDP seems relatively unlikely.
trade, war, fed, investors, economy, trump
Thursday, 24 May 2018 11:15 AM
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