Dollar Makes Risk-Off Gains as Trump Signs New Trade Tariffs, Blasts WTO and Signals Start of Global Trade War

- US Dollar rises as Trump announces tariffs, says WTO a disaster for US

- Actions against China to heighten fears of a "trade war"

- Analysts are divided over what it means for the Dollar longer-term

© Gage Skidmore

US President Donald Trump has announced fresh trade tariffs, this time targeting China.

Signing the order to impose up to $60BN worth of duties, Trump warned; "This is the first, but this is the first of many... the WTO has been a disaster for the US."

The comments clearly indicate an agressive pivot toward protectionism that will almost certainly find retaliation and the prospects of a global trade war are now elevated.

Global stock markets are in the red while US treasury yields and the Dollar moved higher as traders shunned risk assets.

More than 100 different types of goods currently imported from China will face fresh duties in retaliation for alleged intellectual-property thefts. Tariffs will target aerospace, information and communication technology, and the machinery space at 25%. The US will also raise a WTO case and implement investment restrictions.

China has said they will respond with ‘measured and proportional’ levies on the US, which is expected to include imports of US automotive, soybean, aircraft and computer chips.

"This is war," says Miles Workman, an economist with ANZ Bank, "agriculture is considered a likely target because it’s one of the few sectors where America has a trade surplus with China and it’s a sector weighted towards Trump’s support base."

History tells us trade protectionism can significantly impact global growth as tariffs can distort global markets, reduce efficiences and will threaten the benefits that decades of trade liberalisation has delivered.

Markets know this, which is why many sank into the red while safe-haven currencies such as the Yen, Swiss Franc and US Dollar rose.

The Pound-to-Dollar exchange rate slipped to 1.4102 and the Euro-to-Dollar rate was quoted at 1.2315 after the announcement.

"It’s time to dust off the ‘sea of red’ phrase again. Those who expected us to retest the lows of February now look like prophets. The FTSE 100 has already returned to its low, but the Dow has another 4.6% to go before it hits its own 2018 nadir. Momentum is certainly picking up to the downside, but it seems odd to think that tariff wars are the real culprit," says Chris Beauchamp, an analyst with IG.

Action against China follows a US Trade Representative investigation into Chinese trade policies and practices that was initiated at the behest of President Trump in August 2017.

"The acts, policies and practices of the Government of China directed at the transfer of U.S. and other foreign technologies and intellectual property are an important element of China’s strategy to become a leader in a number of industries, including advanced technology industries, as reflected in China’s "Made in China 2025" industrial plan," reads a notice in the Federal Register, dated August 24, 2017.

"The Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurement, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies."

Action against China also comes closely on the heels of a White House decision, on March 09, to levy new tariffs of 10% and 25% respectively on imports of aluminium and steel into the US. China previously said it will retaliate against those if it is not exempted from them, prompting fears of a possible "trade war". This response suggests it would also be likely to retaliate in kind to this week's measures. 

"This is serious stuff and will be met with a stern Chinese response. It is spectacular that global risk appetite has held together as well as it has thus far on this issue – stay tuned, the volatility could rise across markets, though as we have expressed before, the reaction function in FX is not particularly straightforward," says John Hardy, chief FX strategist at Saxo Bank.

"USD/JPY could fall to 105 on this escalation of a trade war – while the US dollar could fall further given the rise in US political and policy uncertainty premium," says Viraj Patel, an FX strategist at ING Group. "However, under a ‘Cold Trade War’ scenario – and in the absence of an escalation of a broadening of US tariffs to other sectors and countries – we think tit-for-tat protectionist measures is unlikely to materially dent global risk sentiment, giving rise to what we label as a ‘nervous Goldilocks’ environment."

Fears are that an increase in so-called protectionism from the White House will lead to a vicious cycle of retaliatory actions between the US and other countries.

While most economists agree this will be bad for economic growth in the US and elsewhere, opinion is divided over the implications for the US Dollar. Some say a trade spat will hurt the Dollar and anything else it touches, while others have suggested the Dollar should actually benefit from the White House's protectionism. 

"If this trade policy strategy were intensified and triggered a global trade war – which is still not our baseline scenario – this would give an additional boost to domestic demand for US products – at least initially," says Ulrich Leuchtmann, head of FX strategy at Commerzbank, in a recent note.  "Consequently, relative prices would also have to shift further to restore the balance between supply and demand. If, additionally, the Fed were to clamp down on inflation, this would result in further appreciation pressure for the Dollar."

For their part, the White House and its trade representatives are clear about the agenda they are pursuing: America First. This suggests global economic growth is much less of a concern in Washington than reducing the US trade deficit and using United States might in the global economy to achieve a better deal for American workers.

"The President believes – and I also agree – that long-standing trade deficits to some extent reflect market distortions, and that they are having a negative effect on U.S. workers and businesses. We also of course have a massive goods trade deficit with China which we should speak about at some point – $375 billion," says Robert Lighthizer, the United States Trade Representative, in an address to the House Ways and Means Committee Wednesday.

"I know that the Members here have a variety of views on these figures. But the President believes they raise significant concerns. They indicate that sometimes the global rules of trade make it harder for U.S. companies to compete and specifically to export. The trade deficit also indicates that in the United States the costs of globalization are falling most heavily on blue-collar workers, and this is something that is bad for the economy and bad for the society."

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