Business World

Monday 14 October 2019

Ken Fisher: 'Why fears over Trump's tariff battle are misplaced'

Strategy: US president Donald Trump has used tariffs to leverage support from others. Photo: Bloomberg
Strategy: US president Donald Trump has used tariffs to leverage support from others. Photo: Bloomberg

Ken Fisher

Here's a serious secret: seen correctly, US president Donald Trump's trade war sets the stage for European and global stocks' next big leg-up. Hated by most, feared by all, tariffs may capsize investor expectations, creating huge positive surprise potential when their reality plays out. Let me explain.

Yes, tariffs absolutely are bad. They're taxes on imported goods that typically increase prices for consumers and businesses, adding costs and friction to trade, and hurting exporters.

Modern supply chains mean even countries not directly involved can get hit.

Most economists see the eurozone as particularly vulnerable, considering exports comprise 46pc of its GDP.

Last year, one German think-tank put Ireland among the most at-risk nations if the trade tiff mushrooms.

Hence, tariff fears seemingly stoke global volatility. But tariff tumult is more fear than functional fact.

Nearly three years into the Trump presidency, he remains widely, wildly misunderstood.

Pundits insist his tariffs are fundamental and permanent policy, fulfilling his protectionist campaign pledges. Were that true, they would be huge. But see how they really aren't.

Including the latest escalations, all of Donald Trump's threatened or enacted tariffs - plus retaliatory tariffs from China, Europe and elsewhere - target €980bn of goods globally.

If we exaggerate and envision a 25pc tariff on all these goods, tariffs would total €245bn.

Sound big? It's just 0.3pc of our €78trn global GDP. Nowhere near large enough to render recession in a world the IMF sees growing 3.2pc this year, including inflation. Tariff payments would total just 9.8pc of the IMF's estimated 2019 GDP growth. Not big. But actually smaller still. Why?

Tariffs encourage avoidance. Importers can source some goods from where tariffs don't apply.

Companies can ship through third-party nations, sometimes fudging origin labels.

For example, Vietnamese exports to America increased by 22.4pc in 2019's first half versus 2018. Vietnam's imports from China rose 18.2pc.

Electronics and computers led both. Coincidence? No.

Trump knows these tariffs aren't huge and are partially dodged. Revenue collection isn't his goal. Nor is restricting imports. It's winning re-election next year.

Tariffs are a negotiating tool designed to extract concessions - even tiny ones - which he can tout to trade-sceptical voters, particularly in America's industrial midwest. Trump needed those voters to win in 2016. He needs them again in 2020.

Trump uses protectionist threats to strike all manner of small deals. In June 2018, he threatened the EU with tariffs on autos and Irish whiskey. European Commission president Jean-Claude Juncker rushed west to defuse that threat. Once stated, the meeting quickly turned to a potential trade deal - and a photo op.

This May, Trump threatened to tariff Mexican imports. Then, days later, he and Mexican president Andrés Manuel López Obrador agreed to a non-economic migration control deal. Tariffs vanished.

With China, Trump's aims are two-fold. One: advance US business interests in China. Two: use tariffs as leverage to secure China's help bringing North Korea to the table for nuclear negotiations. Chinese president Xi Jinping has rare influence over North Korea's Kim Jong-un.

Last year's China tariffs preceded Trump's summits with Kim - both times. Once Trump and Kim met, the trade spats quietened.

They restarted this year after Kim resumed weapon tests. When Trump needs China's help, his trade talk toughens.

August's tariff tiff looks similar. Consider: after introducing new tariffs, Trump delayed taxing many consumer goods through December 15.

That's an admission he sees tariffs as potentially hitting American consumers - voters -right in the big holiday shopping season. His goal isn't economics.

It's to get negotiations moving forward. Hammering out a tough-sounding Chinese deal is great 2020 campaign material.

He'd be nearly unbeatable if he could seal a real North Korea deal.

Tariffs and Trump's trade wars are big fears now of a smaller problem now and later.

That's always bullish. The fear is priced into stocks now.

As reality evolves, eventually it will help push stocks higher everywhere, but particularly in export-heavy Europe.

Ken Fisher is the founder and executive chairman of Fisher Investments, and chairman and director of Fisher Investments Europe. His regular column for the Irish Independent is published on the first Thursday of every month

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