US trade tariffs and Groundhog day

1. He’s not going to do it in the end, is he?
2. Even if he does, it won’t last long, will it?
3. Aren’t we at least partly to blame for it, even?
4. And we are far enough away that it won’t really impact us much, will it?

Yes, yesterday was Groundhog Day. No, really – 2nd February. Big news, locally (and it wasn't good, I've just read). But the front page of today's Financial Times was always going to be taken up with President Donald Trump’s 'Saturday Night Special' on trade tariffs (25% for Canada and Mexico; a 10% increase on China).

As to the earlier questions about whether he’s going to do it, and all that: it’s what many people thought along the way with respect to the War in Ukraine starting three years ago, me included. And the answers in that case, so far, were:

1. He did do it.
2. It did last.
3. It was irrelevant given the aforementioned answers.
4. It did impact our Cost of Living, and also GDP once the interest rate changes it caused fed through the system.

With Mark Twain’s oft-quoted maxim that “history never repeats itself, but it rhymes” in mind, what are we to make of the current situation with respect to trade tariffs? Of course, one big technical difference between Russia then and the US now is that the former isn’t in NATO, and the latter is, which is another way of saying that we NATO members (US included) are treaty-bound allies with a long history of friendship, aren’t we? I mean, we’re fundamentally rowing in the same direction in terms of geopolitical and economic goals, aren’t we? I think we are, when all is said and done. But at least some might wonder a bit.

Anyway, back to those four questions raised at the start:

1. President Trump has done it in terms of announcing tariffs on Canada and Mexico. As for China, targeting that country simultaneously does gives the situation an immediate broader dimension that hints at US concerns extending beyond the integrity of its own physical border (see also what Howard Lutnick said below in his confirmation hearings this past week).
2. We don’t know what President Putin’s intentions were at the outset of Russia’s Special Military Operation in terms of its likely duration. All we do know is that the war is ongoing even though there was an early attempt at peace. What’s going to happen with trade now? Will cooler heads prevail? Can the genie be put back in the bottle? It might be harder than we'd like to think, judging at least by the snap reaction of Mexico, Canada and China to the news. Yes, last week’s 12-hour fracas between the US and Colombia over the return of illegal immigrants will quickly be forgotten, won’t it (chances of it being forgotten have already risen on subsequent events, less than a week later!!). Does President Trump hold grudges on such matters? Elon Musk sometimes seems to, if my reading (last week) of Walter Isaacson’s biography of him is right.
3. Three years on from Russia’s invasion of Ukraine, almost nobody publicly seems to care about whether the prior actions of the West had anything to do with what subsequently happened in Ukraine. “Russia crossed a line and invaded, which you don’t do in any circumstances” seems to be the almost universally held view in the West. The question is are we now going to feel likewise with respect to the US and its tariffs? Common sense says they are almost completely different issues, of course, which is at least one ground for relative optimism. For the new administration, perhaps tariffs are going to be their preferred "continuation of political activity by other means": it is an improvement on what Von Clausewitz said, which is something.
4. In thinking about trade recently, I’ve even brooding on the idea that tariffs might be somehow a lot less consequential now than they were in the 1930s, when just about everyone blames them at least partly for the depth, duration and global reach of the Great Depression. But take the UK more recently for a (potential) counter-example: we left the European Union and yet we suffered neither a recession nor noticeably higher prices as an immediate, direct result of it. Didn't we (I'll admit - not everyone will completely agree with this)? The obvious problem with my seeds of potential optimism is that significant tariffs do impact firm-level costs quickly when they occur (starting Tuesday for the aforementioned Canada, China & Mexico). However, the action announced on Saturday evening only affects US-Canada, US-Mexico and US-China trade, and nobody else's (Germany-China, say). Not only that, but it is very hard in the near term to imagine US action on tariffs "spilling over" into higher tariffs between other countries. So, the spill-over effects from US tariffs - even if sustained - look likely to be a lot less problematic than the global spill-over effects from Russia's invasion of Ukraine. For those countries that are affected, however, it is worth noting that Central Banks that did face higher prices as a result of Russia's invasion of Ukraine (which is to say virtually all of them) did raise interest rates rather than look the other way and "see through" the one-off increases. Will the US Federal Reserve do the same now, for example, if US trading partners do retaliate with higher tariffs themselves, and US companies pass theses on to US consumers in higher prices? It's all a bit less likely, I would like to think. If nothing else, President Trump might have something to say about it (and US companies may respond more firmly to Presidential prodding than Fed Chairman Jay Powell).

Just to be clear, Russia’s invasion of Ukraine in 2022 is virtually completely incomparable to the US action on tariffs announced on Saturday night. And yet given what we know happened in the former case – he did do it, it did last, and it did have a significant impact and those directly and indirectly impacted – we should at least wonder (if not worry) somewhat about just those few parallels, if nothing else. Russia’s invasion of Ukraine was awful and inexcusable. Full-stop. And proposing tariffs on Mexico, Canada and China is different in just about every way imaginable to it. But the question at hand here is whether the issue will quickly blow over or whether, instead, trade friction is here to stay for a while, with tangible consequences while they persist.

Unfortunately, during his nomination hearings last week, Commerce Secretary designate Howard Lutnick said: “We are treated horribly by the global trading environment”, and that “we can use tariffs to create reciprocity, fairness and respect”. It hardly inspires confidence that the whole issue will be back in the bag this time next week, alas. In fact, the last time that the US current account showed a surplus was all the way back in H1 1991, and the cause was Japan and other nations making bilateral financial contributions to the US-led Operation Desert Storm in Kuwait and Iraq. Wouldn't you know it, but a big part of the US beef with many of its allies is the latter shirking their responsibilities when it comes to financial contributions towards collective defence.

In the meantime, come on Punxsutawney Phil: think again. Are you sure that shadow you just think you saw wasn't the result of someone standing in front of a nearby spotlight?

And at least I've finally found a personal use for Bitcoin, which is that it trades 24/7. Anyway, it fell yesterday, and it's down 10% since Friday, which sounds bad, although maybe it's actually good: it is Bitcoin, after all.