Sleepwalking into a Trade War

Although stocks have exhibited a degree a nervousness since early March as trade tensions escalated, most investors have been remarkably complacent about the prospect of an all-out trade war. But slowly but surely there have been tit-for-tat retaliations to our impositions of tariffs on Canada, the E.U. and China. Although in the grand scheme of things the tariffs imposed to date represent a small share of global commerce, make no mistake, sand has been thrown into the gears of global commerce. Because commerce has become so globalized the tariffs not only act as a tax on economic activity they also act as a negative productivity shock which will mean higher inflation and lower economic growth. It seems to me in the words of World War I historian Christopher Clark we are “sleepwalking” into something very much bigger than what the market now expects. (See https://shulmaven.blogspot.com/2013/04/my-amazon-book-review-of-christopher.html)

Most market participants believe that a full blown trade war would be so damaging to the global economy that cooler heads will prevail.  Think again, is Donald Trump a cooler head? He loves controversy and if he wants a full blown trade war he will probably get one. Over the weekend Axios reported that the white House has already draft legislation to pull the U.S. out of the World Trade Organization. It won’t pass, but it certainly reflects Trump’s mindset.