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What's A Little Tariff Rift Among Friends?
BY SELVA FREIGDO - 13/06/2018 | VIEW MORE ARTICLES BY THE DAILY RECKONING

What a (long) weekend…pun intended.

As you probably heard, there were some tensions in the Group of 7 (G7) summit. Mainly between the US and Canada.

What happened?

As Bloomberg reported:

The weekend’s G-7 summit in La Malbaie, Quebec, focused largely on Trump, and trade. It was tense at times, producing iconic photos, but ultimately the leaders cobbled together a joint statement backed by all seven nations — in part because the U.S. abstained from climate pledges and one to curb plastics pollution of oceans.

‘The summit ultimately looked like a success, and Trudeau, the host, hailed it as such. In his closing press conference, he avoided direct attacks on Trump while saying Canada, as a longtime military ally, is “insulted” by U.S. tariffs imposed on grounds of national security.

‘Trudeau also pledged to proceed with previously announced retaliatory tariffs on certain U.S. products — which have overwhelming public support in Canada — and added: “We’re polite, we’re reasonable but we also will not be pushed around.”

‘Trump, having left the summit Saturday morning, was aboard Air Force One to Singapore for his summit with North Korean leader Kim Jong Un when the closing communique was published online just before 7 p.m. The president tweeted minutes later, saying he was now ordering his staff not to sign the completed document because of Trudeau’s “false statements.”

The meeting had already started tense on trade and ended in a bit of a fiasco.

Could there be a total trade war?

It all stems back to March, when the US announced it would impose tariffs on steel (25%) and aluminium (10%) imports. Yet they allowed temporary exemptions for some allies, like the European Union, Canada and Mexico.

But at the end of May, the US didn’t renew their exemptions, and announced that the tariffs would start applying.

Canada and Mexico were prompt to retaliate.

Canada announced it will be imposing tariffs from 1 July on steel, aluminium and several other products like whiskey and orange juice coming from the US. Mexico imposed tariffs on steel and cold meats.

The EU filed a complaint with the World Trade Organization (WTO). They also announced tariffs on over US$7 billion US imports. As you can see in the map below, tariffs will mostly affect the US states of California, Michigan, Tennessee and New York.


Source: Business Insider
[Click to enlarge]

I mean, it’s easy to see why US allies are upset over steel and aluminium tariffs.

Canada and Mexico are the US top trading partners, along with China.

The US is the world largest steel importer, and the top ten steel exporters to the US make up 78% of all US steel imports. Canada is the top exporter with a 16% share, Mexico is fourth with a 9% share, and Germany has a 4% share, as you can see in the graph below.  


Source: CNBC
[Click to enlarge]

Prepare for the worst

But things probably won’t end here.

After Trudeau’s statement, Trump tweeted on one of Canada’s major tickets from the plane:

Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!

Vehicles are one of the top US imports from Canada. According to the US department of commerce, the US imported US$56 billion from Canada.

That’s the thing with trade wars. Once they start, it is hard to know where it will end.

Meanwhile, on the other side of the world, the Shanghai Cooperation Organization (SCO) summit gave a much different perspective. The SCO, led by China and Russia, included Kazakhstan, Kyrgyzstan, Uzbekistan, and Tajikistan. More recently, India and Pakistan joined.

In a stark contrast with the G7, the SCO ended the summit with a statement to increase cooperation in energy and agriculture and to improve trade cooperation.

The thing is, China and emerging countries have a vested interest in keeping globalisation going. And, according to a recent study by the International Monetary Fund (IMF), emerging countries could have more to gain from it than advanced economies.

According to the study, while globalisation will still create economic growth for richer economies, they will have diminishing marginal returns. That is, the more globalised the economy, the smaller the growth rate benefit over time. In contrast, emerging economies not as integrated will see increased gains in well-being and poverty reduction.


Source: IMF
[Click to enlarge]

In other words, the US has less to gain from globalisation compared to emerging economies like China.

Yet a trade war can be quite damaging. A trade war can increase prices and hit already slow growing worker’s salaries.

We are already pretty much in a trade war. And it’s not just against China, now it’s splattering US allies.

Europe is in a tough spot, with an increasingly distant US, a hostile Russia, and divisions inside the block. 

And, we could be in for more surprises this week. Trump is meeting with North Korean leader Kim Jong Un…the US inflation report is due…and the Fed meets on monetary policy.



View More Articles By The Daily Reckoning

The Daily Reckoning's mission is to look at the investment world and the financial world in a sceptical and contrarian way. To do that day in and day out and tell you honestly what we see, even if it isn't always popular. If you'd like to subscribe to an alternative look at the mainstream interpretation of events, join for free here.



 

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