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Why Trade War Is Now Set To Get Much Worse

In a note written on Monday, ahead of today’s latest escalation by the US which unveiled a list of $200BN in incremental tariffs sending risks assets sharply lower and yet which was perfectly expected and previewed both here and elsewhere as it was part of Trump’s escalating tit for tat trade war strategy as summarized in this chart shown first nearly three weeks ago…

…  Standard Chartered’s new head of Global G-10 FX strategy Steven Englander made an accurate prediction: more tariffs are coming.

Englander first’s point is that last Friday, as the original $34BN in tariffs were unveiled officially launching the trade war, is that shortly afterward, investors took a benign view of the first round of tariffs, for three reasons:

  1. The US economy has a strong head of steam; China’s economy is somewhat sideways or faltering a bit and its financial markets have been under pressure, leaving the US asset market more resilient
  2. The current round of tariffs will likely have small effects
  3. The EU is sounding more conciliatory

And, as he correctly added, these three factors also provided the Trump Administration with incentives for a more aggressive round of tariff imposition, for the following two reasons:

  1. The tariffs so far are politically popular even in agricultural and industrial states
  2. Tariff measures are very easy to reverse

But it was his next point, one which we have made numerous times and just this morning again most recently, that was most crucial and explains why the tit-for-tat trade war escalation between the US and China is only set to get much worse:

The temptation (primarily for the US but for trading partners as well) is to keep ramping up measures to convince the other side that they are serious about staying the course. Tariffs can be rolled back quickly when an agreement is reached.

…click on the above link to read the rest of the article…

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