Poorly Justified US Protectionism Brings Bad Economic and Fed Policy Omens
President Trump’s announcement of impending tariffs on steel and aluminium has raised fears of an escalating trade war that would be detrimental for both equities and bonds due to higher inflation.
Steel and aluminium imports into the US are far less significant than finished capital and consumer goods, although their importance in satiating demand has increased over the past twenty years.
Legacies stemming from the Great Recession vis-à-vis unfair foreign competition help to explain why capacity utilisation for steel producers has not reached the level normally associated with this stage of the economic cycle.
The major hollowing out of US steel productive capacity occurred in the early-1980s during a period of excessive exchange rate strength, but subsequent structural decline has been difficult to arrest due to the lack of comparative advantage compared to other trading partners.
An escalating trade war would offset the intended effects of tax reform on the corporate sector by inhibiting “animal spirits” via higher operational costs and greater uncertainties related to supply chains.
The potential removal of the trade balance as a safety value against higher inflation, due to protectionism, would raise the ante on the Fed to prevent overheating via more aggressive policy tightening.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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