The G7 Summit in Canada in June was marked by uneasiness and tensions. The key issue was the set of tariffs the US had decided to impose on steel and aluminium imports. Additionally, the US president announced a ban on Chinese investment in US high-tech companies. The status of this news is somewhat unclear, but it certainly exacerbated tensions. As other participants of the Summit expressed their intentions of retaliatory measures, markets reflected these uncertainties.
Chinese markets plunged in the days following President Trump’s announcements that further tariff imposition may be in order for Chinese goods worth $200 billion. China of course did not fail to keep up, announcing countermeasures to every new outburst of the US president. What started with a proposition of tariffs on $50 billion worth of Chinese goods is now at $200 billion with more likely to follow. This snowballing exchange of tit-for-tat trade restrictions between the US and China is reminiscent of the consequences of the infamous Smoot-Hawley Tariff Act of 1930 – a piece of legislation passed despite the protests of the business community and academic economists – which enhanced the momentum of the trade wars at the time. To return to the present, most of the markets reacted predictably to the tariff news. Stock markets around the world fell as prices of raw materials started to rise.
GOLD DID NOT ASSUME THE ROLE OF SAFE HAVEN
Despite the stock market drop and the Dow Jones index breaking the 200-day moving average in a losing session on 25th June, gold did not gain in value. It dropped to 1255$ per ounce the following day, which is about 5% down of the value at the beginning of the year. It has since recovered but also displayed volatility with drops even below that mark maintaining a bearish trend on weekly charts. This time gold failed to be perceived as a safe haven by investors. The question as to why gold failed to capitalize on growing political and economic uncertainties as well as inflation, another item in the news recently, remains open. Should we really ascribe this movement entirely to the prospect of a stronger USD?
UNCERTAIN ROAD AHEAD FOR THE GLOBAL ECONOMY
The question is whether markets have overreacted and the said drops were just a temporary expression of this sentiment, or is this a herald of greater volatility ahead of us? If President Trump intends to continue down the path of the 1930s, then pessimism is more than justified. On a more optimistic beat, one could argue that this should be an overreaction since protecting certain sectors from the effects of global competition is nothing new in the global economy. Every country implements some sort of subsidizing of certain sectors of the economy and tariffs are an indirect way of doing just that. The US itself was one the most protectionist countries of the 19th century. Besides, the US also imposed tariffs on steel imports as recently as 2002 only to lift them by the end of 2003. On the other hand, if such measures were implemented across the board by everyone relentlessly over a longer period of time, the resultant trade wars would erode the global economy and lead to a situation reminiscent of the 1930s with grim consequences of a global depression.