By Michael Every of Rabobank
Markets are moving on trade news, tech stocks hit by the White House considering draconian moves against the Netherlands’ ASML and Japan’s Tokyo Electron for continuing to sell semiconductor equipment to China. The US can, if it chooses, prevent any entity selling items involving US tech. One wonders if the White House also saw the headlines about Google and Microsoft allegedly helping China circumvent exports controls on Nvidia chips(?)
Things will get far bumpier for markets, however. As I type, the Republican National Convention (RNC) is listening to “isolationist”, “protectionist”, “national conservative” vice-presidential candidate Vance, following former Trump national security advisor O’Brien saying he’s happy with the idea of 100% tariffs on Chinese imports. Two key points from Vance: “I will never forget where I came from,“ and, “We are done catering to Wall Street. We’ll commit to the working man. We’re done importing foreign labor.” Or importing in general, it seems.
As someone said of the RNC big screen video of Trump dancing to ‘YMCA’, “This is no longer your father’s Republican Party.” Some say it’s closer to your grandfather’s Republican Party, but your great-grandfather’s is more correct given Trump’s fixation on former President McKinley. Note the latter introduced US tariffs as a congressman in 1890, leading to a Democratic landslide which kicked him out of office, before winning the presidency in 1896 by again promising high tariffs,… then being assassinated in 1901. However, as I showed in 2017’s ‘The Great Game of Global Trade’, the following set of quotes show free trade is the US policy aberration
"I use no porter or cheese in my family, but such as is made in America.” Washington (1789-1797)
“Keep pace with me in purchasing nothing foreign where an equivalent of domestic fabric can be obtained, without regard to difference of price.” Jefferson (1801-1809)
“The conditions necessary for Free Trade’s success --reciprocity and international peace-- have never occurred and cannot be expected.” Munroe (1817-1825)
“It is time we should become a little more Americanized, and, instead of feeding the paupers and labourers of Europe, feed our own.” Jackson (1829-1837)
“Give us a protective tariff and we will have the greatest nation on earth.” Lincoln (1865)
“Within 200 years, when America has gotten out of protection all that it can offer, it too will adopt Free Trade.” Grant (1869-1877)
"Free trade cheapens the product by cheapening the producer. Protection cheapens the product by elevating the producer.“ McKinley (1897-1901)
“Thank God, I am not a Free Trader.” Roosevelt (1909-1913)
“We need protection as a national policy, to be applied wherever it is needed.” Coolidge (1923-29)
Yet while protectionism is now a topic of market conversation, and will be more so after Vance finishes speaking, most aren’t grasping what large-scale, US-centric protectionism actually implies.
One reason for that is that they have little to do with the physical economy, just digits and lines on screens. The last time this disconnect between physical reality and market views was laid bare was 2021-22, when the latter thought inflation and rates couldn’t go up, and those looking at logistics were saying we were “In Deep Ship”. Which we were.
It seems quite likely that we are going to get a repeat of that disconnect again today, as markets and central banks focus on imminent rate cuts, and ignore what we warned in January – “Same Deep Ship, Different Day”.
Look at footage of an oil tanker being explosively damaged by the Houthis this week, as they look to teach groups in Africa how to do the same, and wonder if this can’t yet get far worse. Elsewhere, Russia just put out an alert for Ukrainian sea drones round the crucial oil and commodity port of Novorossiysk: were these to disrupt cargo flows, it could have a major market impact.
Look at China-Europe freight rates soaring from $1,291 to $8,048 over the past year, now nearly 60% of the incredible Covid-era peak. Deliveries are taking up to three months, when they were formerly a month. How can any rational firm not try to stock up, exacerbating the problem?
Then think that are we going to get rate cuts soon, which must surely boost consumer demand (though strong Aussie jobs data today back our house call for more policy tightening there, and we have separately pushed back our call for the first RBNZ cut from August to October).
Moreover, any logical firm is going to buy as much from China now as it can to avoid any looming US tariffs.
In short, a worse supply-side logjam seems likely even before we get any US tariffs, and despite the evident goods deflation that we have been seeing for much of the past few months.
But don’t listen to me: listen to logistics experts. @FreightAlley notes, “Trumponomics promises to reshape the global economy in a way that hasn’t happened since the opening of China. The front lines will be across global supply chains. FreightWaves is hiring a full-time writer exclusively focused on the topic.” Watch that space.
Another reason why markets don’t fully grasp what is at stake here is that most in them, understandably, don’t understand how the global system works, just their small area. I’ve repeated many times how US tariffs don’t just mean higher inflation, but wholesale changes to the foundations of the entire global economic and market system: everyone and everything, except many in the US, will be thrown into dark, stormy waters if we return to a neo-mercantilist 19th century world on the High Seas - and we are setting sail in that direction, like it or not.
Asian exporters, for one, where China is wrapping of the CCP’s Third Plenum: we shall see what solutions they can come up with that don’t translate into even more exports, and so even fiercer global protectionist backlashes.
Europe, for another. Relatedly, the EU in will be on tenterhooks today waiting to see if von der Leyen is re-elected as President of the European Commission, despite a scandal swirling round her, and releases the detailed plans drawn up by Mario Draghi for boosting production and logistics to ensure ‘EU strategic autonomy.’ [ZH: she was].
However, France still has no government capable of building strategic autonomy, so is unable; and Germany has a government that is unwilling.
Case in point: Berlin is going to slash its aid budget to Ukraine from €8bn to €4bn to balance its books. True, Germany is limited by its constitutional debt brake, which restricts the federal deficit to 0.35% of GDP, except in times of emergency – but it’s Finance Minister Lindner who won’t declare the “existential” war in Ukraine to be one.
This was just before would-be VP Vance --a vocal sceptic of the US stepping in to bridge Europe’s inability/unwillingness to support Ukraine-- took to the stage. Somehow, despite a notable lack of ammunition, Berlin never fails to find a way to shoot itself, and so Europe, in the foot.
Note that another Trump presidency would not be impressed by miserly, pacifist, mercantilist Germans in a world of profligate, militarist, mercantilists that can literally blow German goods out of the water - and foreign markets. One wonders how much more than €4bn Berlin’s decision might end up costing them.
