Review of the week: Back to the future

“Making America great again” was always a paean to Ronald Reagan’s 1980s, so it makes sense that the Donald is turning the clock back on global trade. Chief investment officer Julian Chillingworth takes a trip down memory lane.

It was another trade-news-heavy week, with Donald Trump bashing the US Federal Reserve’s (Fed)  monetary policy because it was strengthening the dollar, and floating 100% tariffs on French cheese and champagne in response to the European Union’s (EU) digital tax on American tech giants. Mr Trump also claimed that he didn’t need to agree a trade deal with China before next year’s election, although that has now been interpreted by many as simply a negotiating tactic.

Speaking of trade deals, the Japanese Parliament rubberstamped one between the US and Japan last week. Mr Trump has been threatening to slap 25% national security tariffs on Japan’s car imports. The deal opens up Japan to American beef, pork, wine and wheat in return for lower duties on some industrial goods. Auto parts and cars are not included, however, and Mr Trump’s threatened national security tariffs haven’t been withdrawn either. The deal goes into force on 1 January.

So why did Japan agree to such a sweetheart deal for the US despite getting little in return? As slippery as a greased snake, the US has managed to cripple the only institution that prevents the proliferation of ‘might-is-right’ trade policy. Tomorrow, two of the three remaining judges on the World Trade Organisation’s disputes bench, the appellate body, will retire. The US has blocked any new appointments to the appellate body, which has been around since 1995 and should sport seven members, effectively neutering the world’s trade disputes forum.

This will give America – and any other country – free rein to apply tariffs and bend the world’s rules of trade against any nation that doesn’t have a free trade agreement with the aggressor. This will benefit larger countries, especially the US, which can use their heft to bully more vulnerable nations. Perhaps that’s why Mr Trump declared he would impose tariffs on Argentina and Brazil because their currencies were weakening more than he would like. In reality, these currency movements are exactly what you would expect: the US is a stronger-performing economy that had been on a path of higher interest rates, while Argentina and Brazil have been struggling economically and fiscally.

We appear to be regressing to the days of bullying US trade policy in the 1980s. Back then, Middle America was getting increasingly concerned about a rising Eastern powerhouse that was threatening to eclipse American manufacturing might. Japanese technology executives were arrested for industrial espionage and the nation was strong-armed into concessions to curb imports to the US, protecting American automotive companies in particular. There truly is nothing new under the sun.  


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Source: FE Analytics, data sterling total return to 6 December

Here we go again

Sterling continues to rise against the dollar, reaching for $1.32 as polls show the Conservatives should land a workable majority at Thursday’s election.

The Financial Times’ poll of polls forecasts the Conservatives would take 43% of the vote, Labour 33%, and the Liberal Democrats 13%, with the rest spread among the Scottish National Party, the Green Party and the Brexit Party. The election is an odd one, as the Conservatives really need to win an outright majority, with Labour likely benefiting from a hung Parliament, despite its significantly lower seat share. The Conservatives have leaned right and heavily pro-Brexit, no doubt helping it to soak up disillusioned Labour leave voters. But it has also left them isolated, especially given the effective collapse of the Brexit Party. It would be difficult for the Conservative Party to make any alliance with the Lib Dems, SNP or Greens, given they are all anti-Brexit.

It’s going to be a nail-biter, that’s for sure. And there’s more action packed into the week from around the world too. The central banks of the US and EU meet on Wednesday and Thursday respectively. No changes to policy are expected, but investors will be watching both Fed Chair Jay Powell and European Central Bank President Christine Lagarde very closely. Economic data out of the US has been promising over the past couple of weeks. Unemployment returned to a 50-year low and the number of jobs added in November rocketed. As for Ms Lagarde, it will be her first meeting at the helm and people will be intrigued to hear her views on the current state of the euro area and future policy.

European data has been glum. German industrial production was 5.3% lower in October than a year ago, with the slowdown driven by capital goods (machinery, tools, vehicles and other equipment used to make consumer goods or transport them). Construction output and the manufacture of components increased modestly. This bad news followed an IFO manufacturing survey showing dampened domestic demand had led to weaker-than-expected orders for the German industry. Despite worries about the spill-over effects of the US-China trade war, foreign orders actually picked up slightly in November.

And, of course, Mr Trump will no doubt weigh in with some more market-wrenching tweets. Good luck out there.

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