Trump Has Launched the Kind of Trade War That Produces a Global Recession
The United States, Europe, and China are heading into a turbulent economic storm. It seems inevitable that a global recession could be in full swing by 2019.
This prediction is not the fruit of hyperbolic punditry. The pedantic International Monetary Fund (IMF) has warned the Donald Trump administration that the United States could experience a recession in the next few years, if not sooner.
And if the U.S. catches a cold, the world catches a global recession.
The Trump tax cuts that Congress approved in December 2017—along with the expectation of increased government spending—will push the U.S. federal deficit to rise above 4.5% of gross domestic product (GDP) by 2019. (Source: “IMF: US is the Only Advanced Economy with debt Rising,” Committee for a Responsible Federal Budget, April 19, 2018.)
The deficit has, therefore, more than doubled since just three years ago. The IMF added that, at current levels, President Trump’s economic policy has become so unusual that only the Lyndon B. Johnson administration from the 1960s could match.
Short-Term Boost
Surely, Trump’s fiscal generosity—for the richest, of course—may have given a boost to the U.S. economy in 2018. But it’s a short-term boost.
The tax cuts have also magnified the risks that the United States and its main trading partners (if any are left) will incur.
If—or rather when—the tax cuts fail, the U.S. Treasury won’t have the tools to fix the unpredictable economic downturn.
As 1929 or 2008 has indicated (and those are merely the most flagrant examples), an economic downturn in the United States is highly contagious. The impact will be felt worldwide in the form of a global recession.
The Petrodollar’s Demise?
The most obvious risk is the U.S. debt spiraling out of control. The IMF says it will be about 90% of the country’s gross domestic product (GDP) in 2024. In fact, it has already done that, but the hegemony of the dollar and the end of the gold standard—producing the petrodollar—has acted as a shock absorber.
Geopolitical tensions, however, are redrawing the map of U.S. hegemony. The U.S dollar’s function as the world’s currency of choice (or obligation, depending on perspective) has come under serious threat.
In 2015, the IMF approved the renminbi (or yuan) for special drawing rights (SDR). China now wants the next step, promoting the yuan as a currency that the rest of the world can use to pay for commodities like crude oil: hence the petro-yuan.
The more that the United States enforces sanctions against countries with which it disagrees about regional affairs—such as the cases of Iran and China, for that matter—the more it pushes those countries away from the dollar.
Without the constant and worldwide demand for U.S. dollars, the United States Federal Reserve cannot print more dollars to bypass the debt risk. The weaker—geopolitically, rather than fiscally—the dollar becomes, the less debt the United States can afford.
Tax Cuts and Their Risks
The combination of lower—and permanent—tax cuts for corporations and the richest Americans clashes with the higher debt risk. A global recession would be merely one of the effects of a clash between such titanic problems.
Nevertheless, President Trump has decided to redraw America’s relationships. It’s targeting friends and foes alike.
This may produce some short-term leverage in negotiations. But it also produces what some analysts call “blowback.”
To get an idea of what blowback is, consider ISIS. That organization, in the crudest and simplest terms, represents blowback for the United States’ invasion of Iraq.
Howitzers Against the World Trade Order
Geopolitical pressure has triggered the race for the next world currency. That also explains why Trump has given up on G7 allies in favor of more intense talks with U.S. rivals such as Russia and China.
Those are the countries where the pressure is coming from.
Trump has launched the equivalent of trade “howitzers” against all major parties, friend or foe.
He has challenged the North American Free Trade Agreement (NAFTA) with Canada and Mexico. And he has only just started imposing tariffs.
How Could Tariffs Trigger a Global Recession?
There’s little doubt that a full-on global trade war has already begun. Trump has hit China hard. The U.S. will slap duties on some $50.0 billion worth of goods—including, among other contradictive results, Chinese-made “Buick” cars.
If you visit a Buick dealership in the next few months, you may discover that the famous carmaker’s “Envision” SUV could cost as much as $8,000 more than you expected. (Source: “A Buick SUV May Cost an Extra $8,000 After Trump’s China Tariffs,” Bloomberg, June 15, 2018.)
China has retaliated, and Trump may have lost the vote of U.S. farmers as a result.
Tit for Tat
The Chinese have responded in kind, applying 25% duties on a variety of American products, including agricultural products, fish, and autos—such as those made in Detroit, Michigan and Freemont, California (where Tesla Inc (NASDAQ:TSLA) operates). All the fun and games will have begun by July 6.
Trump, however, has a special kind of stubbornness. And, the initial $50.0 billion worth of tariffs represents a mere appetizer of a potentially much wider scope of additional duties.
Trump seems to ignore the elephant in the room: Boeing Co (NYSE:BA). China has billions of dollars’ worth of “Boeing 737s” on the Seattle aircraft maker’s order book.
Should Trump push hard enough, he could get backfire and blowback both at once. Boeing is the top U.S. exporter by value. And Boeing is a top representative of the U.S. military-industrial complex.
The White House risks pushing a few wrong buttons when it puts Boeing under pressure.
The ECB Puts Europe in the Storm
In between all this, there’s Europe, struggling to keep up.
That struggle will become harder because the European Central Bank (ECB) has announced that it will stop the quantitative easing (QE) program that had helped countries like Italy and Spain recover from the effects of the post-2008 recession.
The point of QE was to stimulate economic growth by making more capital available to lenders and—consequently—to businesses. The underlying premise, of course, of stimulating growth is that there exists a world market to generate the demand that justifies such investment in growth.
Hard Times Ahead
The coincidence of the end of QE in the United States and now Europe could not have come at a more delicate moment: the rather loud beginning of a global trade war.
If the world expected 2018 to be one of those special vintages, marked by growth and continued recovery, President Trump has placed a spoke in the wheel of the economy, leading to a global recession in short order.
It took the world years, if not decades, to build the current trade order, as regulated by the World Trade Organization (WTO). This means countries and companies have spent an equal amount of time establishing their roles within this WTO order.
This Is All It Took to Disrupt Global Trade
Trump has disrupted the WTO system in a measly couple of months.
That’s one of the reasons the risk of a global recession has become so high. A sudden shift in the pattern of trade, combined with monetary tightening policies and higher energy prices, cannot but hurt demand—and not just in the United States, but everywhere.
Tariffs on Chinese imports make sense. But they have a limited logic that breaks in the face of a harsh reality. Many Chinese imports have no American (or European, for that matter) equivalent.
Since the early 1990s, the whole world—the industrial powerhouse of Japan included—has shifted billions of dollars’ worth of production to China and, increasingly, other emerging markets.
Consumers and the Economy Won’t Cope With an Economic Slowdown
Many consumers, therefore, have become accustomed to certain prices.
These prices have been so low as to mask or slow inflationary pressure. The low prices of many goods, relative to the pre-WTO days, have also kept pressure on salaries.
The perfect storm has started to brew. Tax cuts work in periods of high growth and high demand. The impact of flat wages and more expensive goods can only lead to a consumer-led recession, eventually affecting production as well.
With less tax revenue and the potential monetary retaliation against the dollar, U.S. debt can spiral out of control.
Meanwhile, the Federal Reserve has raised interest rates—with plans for more—to prevent inflation from the so-called growth that everyone expected. The world’s central banks might be better advised to reissue QE.
This is what a global recession might look like from an American perspective.
The scenario is such that the United States, Europe, and China are forced to pull back at the same time. The result cannot be but a drop in global economic growth.