What Happens Next?

This is a good time to remind people of my favorite quote from J.K. Galbraith – “there are two kinds of forecasters – those who don’t know and those that don’t know they don’t know”. This has rarely been as true as it is now given the nearly constant stream of changes to tariff and trade policy. Despite this constant change the business community and the ASA member has to plan and set strategic and tactical goals. What CAN be expected in the months to come? The best that can be done at this point is to look at scenarios to determine which are more or less likely. There are essentially a good set, a bad set and a really ugly set (with apologies to Clint Eastwood).

The ”good” set basically assumes that Trump the dealmaker will soon emerge and do what he has done through the majority of his business and political career. Rumors to this effect have been circulating for weeks and there have already been several of these instituted. Most recently there was a retreat from the strictest of the tariffs affecting the auto sector. Ostensibly there are nations very close to getting deals. These include Japan, South Korea, Mexico and parts of Europe. The argument against this frenzy of deals is that it takes two (or more) to engage and many of these nations are not prepared to offer what Trump is demanding. There is also the fact that US consumer patience has worn thin and that begins to worry politicians that rely on constituent support. Analysts are giving this set of scenarios a 60% chance. The hold up here may well be the nations that Trump has to cut deals with. They were expected to be more than eager to reach a deal and willing to make concessions but it turns out they have more options than originally expected. China in particular can pivot in ways that many other nations can’t. There are many countries that still crave Chinese goods and really don’t care whether the US approves. China has become adept at transferring production to third nations as a way to dodge the high tariffs imposed on them and there is simply the fact that China is a command economy and can impose hardships on its population that democracies can’t. US consumers are already rebelling against inflation and it stands to get much worse. Chinese producers are not in a position to do much about the tariff and trade war.

The ”bad” set of scenarios assumes that many of these nations resist the process and refuse to give what Trump wants in the way of concessions – at least in the short term. The talk in these nations has been around finding alternatives to the US market. Can they sell enough to Europe, Japan, Latin America, India etc. to compensate for loss of the US market. To be honest there is no consumer like the US consumer and replacing the US is impossible. Can building new market relationships help blunt the impact? To a degree the answer is yes but only partially and in a few months the pressure to accommodate the US will mount. This scenario holds that deals may start to appear towards the end of the third quarter and that means several months of global pain. Inflation in the US that could hit 4.5% or higher, higher levels of joblessness in the US and globally, turmoil in the markets as the impact of the tariffs start to sink in. This one gets the support of maybe 20% of analysts. As nations explore their options the US continues to behave as if it holds all the cards but that is not entirely true. It will take time to build new markets, just as it will take time to develop new supplier relationships. The US will be hurt by the fact that it is no longer seen as a reliable trade partner and many nations now would prefer to work with another partner rather than trust the capricious behavior of the Trump administration.

That leaves the “ugly” option and this gets pretty grim. The foundation of this scenario is a real period of economic warfare between the US and China. Right now this conflict is described in economic terms. Which nation will blink first in this game of “trade chicken” but there is a great deal more at stake here. China is bent on replacing the US as the world’s dominant economic and political (and even military) power. This is a long term fight for China, one they have been engaged in for decades and have never made a secret of. The US is under attack from China every day – cyber warfare, economic warfare, diplomatic warfare. The US military names China as the primary threat. If China wants to engage in an all-out trade war they have capabilities the US lacks. It is a command economy and a dictatorship. They can impose restrictions on the population the US can’t and they can engage in financial manipulation the US can’t. This trade conflict can very easily escalate and can turn very nasty. Consider what happens if China overtly attacks Taiwan or turns North Korea loose. This has the support of 20% of analysts.

This is basically uncharted territory when it comes to trade. The US has long been a bulwark of free trade support as this provided the US consumer with high quality products at a low price and it was accepted that US production would be sacrificed to a degree. That sacrifice has been judged to have been too much and there are now attempts to gain some of it back. But this comes at a cost as well – this time to the consumer.