Economics & Markets

Should investors worry about a Trump trade war with Europe?

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

We appear to be moving closer to a resolution in the China and US trade war. But should investors now be worried about Trump declaring a trade war against Europe?

Concerns around global trade rally began in March last year when US President Donald Trump ramped up tariff threats, particularly with China, and then threatened tariffs on automobiles coming into the US, which would obviously affect major car makers in regions including Japan and Europe. Since December some of those fears have begun to fade as the Chinese and Americans started talking. It looks as if, despite all of the noise along the way, they’re heading towards some sort of deal.

That deal may not be perfect. But it does look as if the Chinese will cut tariffs, import more from the US, and most substantially, introduce protection around intellectual property and make it easier for foreign companies – notably American companies – to do business in China. That will come as a relief when a deal is ultimately signed.

Europe in his sights

But will Donald Trump then pivot back to Europe and pick a fight over automobiles?

In mid-February the US Commerce Department handed Trump a report. Media reports suggest the report gives him legal underpinnings to impose heavy new tariffs on imported cars on national security grounds.

From then Trump had 90 days – until mid-May – to decide whether to impose tariffs on imported autos. Europe, along with Japan, would bear the brunt of those tariffs.

While there may be lots of noise and threats around this issue, ultimately, I don’t see Trump embarking on a full blown trade war with Europe, and there are several reasons why.

Three arguments against a US/Europe trade war

Firstly, Donald Trump has wanted to find a resolution with China because he wants to get re-elected next year. The last thing he wants heading into an election is for share markets to turn bearish and unemployment to be rising because he’s created new mayhem around a trade war.

Secondly, there’s little public support in the US – and there’s not much support in Congress – for having a trade war with Europe. Maybe there was for a trade war against China, but certainly not against Europe.

Thirdly, America’s trade deficit with Europe is a fraction of the size of its trade deficit with China, which would limit any gains to be had from a trade war with Europe.

So, when you put all those things together, I think the case to embark on a trade war with Europe over automobiles is actually quite weak.

Positioning for re-election

There will be lots of horse trading around the automobile tariff issue, but I think at the end of the day it’s just a negotiating tactic. Ultimately, Donald Trump will come up with some sort of deal with Europe as well as China.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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