This is the real worry behind Trump’s trade war threats

U.S. two-dollar billsPhoto by Leslie Shaffer

The direct impact of U.S. President Trump’s threats of tariffs would likely be minimal, but that’s not the real worry, Capital Economics said in a note on Friday.

“The real worry is that this marks a turning point in U.S. trade policy, away from bluster and brinkmanship towards actual protectionist measures,” Andrew Kenningham, chief global economist at Capital Economics, said.

“We have consistently warned that this would become more likely as the mid-term and presidential elections approach. If so, President Trump may discover that, contrary to his tweet [Friday], there are rarely any winners from trade wars.”

Trump on Thursday said he would formally announce plans for an across-the-board 25 percent tariff on steel and 10 percent on aluminium. The announcement, which reportedly came against the advice and wishes of many of his own advisers and political party, sent stock markets reeling globally.

‘Trade wars are good’

On Friday, Trump stepped up his already inflammatory rhetoric a notch by declaring on Twitter that “trade wars are good, and easy to win.”

The European Union said that in reaction to Trump’s threatened tariffs on steel and aluminium, it would consider retaliatory tariffs on a range of U.S.-made goods. Trump then threatened to tax Europe’s auto exports to the U.S. It’s unclear how this would affect Italian-American carmaker Fiat Chrysler.

Kenningham pointed to the risks of retaliation, noting that the fact that Trump was justifying the tariffs on a “flimsy pretext of national security increases the risks of retaliation.”

However, Kenningham also pointed to another factor: Trump’s general lack of credibility after more than a year of loud, but idle threats.

“Will these tariffs actually be implemented? Not necessarily: after all, we are talking about Trump,” he said.

Kenningham noted that after opposition from Congressional Republicans, U.S. corporations and U.S. allies, as well as the stock market selloff, Trump may yet retreat.

”And it is possible that when the order is written, it will allow exceptions for allies, such as Canada and Germany, who (unlike China!) are big sources of U.S. steel imports,” he said.