This Is All You Need to Know About the Potential Trade War

Patrick Watson  |


We’re in a trade war. No, we’re not. Yes, we are, but it won’t be so bad.

I heard all those conclusions in the last few weeks as President Trump ordered tariffs on US trading partners and threatened even more.

Who’s right?

That’s the wrong question. Trade war isn’t a light switch you flip on and off. It’s more like a big room with hundreds of dimmable lights, and the possible combinations are endless.

Trying to simplify complex situations, we often lose full understanding of them. We miss the nuances, and the nuances can matter—a lot.

So, to see the whole picture, skip the “either/or” arguments and enter the world of “both/and.”

I recently came across three important trade-war analyses. Each highlighted an important nuance that was lost in the news coverage.

The first was from Dr. Woody Brock of Strategic Economic Decisions. He agrees that trade war fears are behind much of this year’s market volatility and could get worse.

At the same time, he thinks parallels to the 1930s Smoot-Hawley tariffs are overdone:

Dr. Brock estimates that a significant trade war in today’s economy would reduce Gross National Income by about 2% over three years. That’s far less than the 8% drop Smoot-Hawley caused in the 1930s.

So, if we get into a full trade war, it won’t be nearly as bad as the best-known historical precedent. That’s good news. But remember, think in “both/and” terms.

Trade wars now can both…

Those aren’t conflicting conclusions. Both can be true… and we may soon find out what that looks like.

In a recent issue of Danielle DiMartino Booth’s Daily Feather, Booth looked at global trade data and saw a significant slowdown coinciding with President Trump intensifying his rhetoric in March.

This chart tells the tale:

Source: Daily Feather. Reproduced with permission.

The credit manager reports are particularly important. They reflect real-time repayment estimates by businesses that keep a close eye on their incoming cash collections.

Timing is important here, says Booth. Right at the end of May, Trump announced he would impose steel and aluminum tariffs on Canada, Mexico, and the European Union… all of which promised to retaliate.

That, plus the following tension at the G-7 summit and actions against China, means June data should give us a solid look at the way businesses are reacting to tariffs and other trade changes.

Watch for reports in early July.



The data I see suggests we are entering a significant trade conflict. What we don’t know is how much trouble it will cause.

Arthur Kroeber of Gavekal Research believes US tariffs won’t make China change its industrial and intellectual property policies. Nor will the Trump administration back down. That means gradual escalation is almost certain.

That doesn’t mean the worst. Kroeber identifies three signposts we can watch for further clarity:

Depending on how those develop, trade war fears could either ease or intensify in the next few months.

But even if the president starts sounding conciliatory, the tension probably won’t disappear. Markets have learned that Trump can turn on a dime, without warning.

And no matter what he does, the last 50 years of globalization will keep losing momentum and eventually reverse.

Today’s technology no longer supports it. That economic megatrend preceded this president and will continue after he’s gone.

In other words, the broad trend is away from free trade and toward increasing protectionism and local production. However, the path from here to there is highly uncertain, and it matters to your investment strategy.

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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