While President Donald J. Trump initiates trade tensions and then escalates them with China, Germany, Mexico, and Canada, he is clearly using the strength and momentum of the US economic expansion to fight all of these battles simultaneously. This is because the US economy is now seeing GDP growth at 4.2 percent, driven by massive tax cuts and deregulation for businesses, and recently extended by strong exports and manufacturing. Even capital investment is increasing across businesses, a sign of future growth. In fact, extrapolating base figures now imply that 4.6 percent GDP is possible.
What does all of this mean? It means that President Trump not only has a bounce in his walk, but he seems to be picking too many fights with too many trading partners. Not known for modesty, Mr. Trump has taken some of the trade challenges to new heights and could, despite strong US growth, damage the global economy – specifically by escalating a trade war with China, the second largest economy on the planet. And it is these two economies that – regardless of what many people think – rely on each other more than Mr. Trump would admit.
Sure, the US economy is a continental economy, tied into friendly neighbors in Canada and Mexico, with a soon to be independent energy supply, making it somewhat less exposed to external economic shocks. But with regards to China, a country in which GDP is expanding at 6.7 percent, it relies on exports and external energy security. Mr. Trump must understand that any damage to the Chinese economy will be felt around the world, starting with emerging market currencies such as the lira and peso as global recessions can start in fx markets.
Those of you may remember the “Asian Contagion” or the “Asian Financial Crisis” of 1997 and 1998 when Thailand made the decision to no longer peg its currency to the US dollar – currency declines spread throughout Asia, the stock markets followed and these economies experienced lower import revenues and sudden government upheaval. This crisis triggered financial unrest in Japan, South Korea, Indonesia, and Thailand, and it continued to spread. The bubbles in these economies, the start of this crisis in 1997 actually look and feel much like what we are now seeing in Argentina, Turkey and other emerging markets right now. So it is easy to see the contagion fears now appearing daily in the press.
We strongly encourage Mr. Trump and President Xi to sit down and work out trade issues one by one – they have armies of negotiators who are paid to do this. However, each day we see more and more articles about trade wars and new contagion fears that suggest these trade battles could turn into a full-blown crisis. We hope cool heads will prevail.