Trump’s trade war re-escalation shows how US President's priorities have changed

The Trump administration has ramped up the trade war, threatening a 50 per cent tariff on European Union imports and 25 per cent tariffs on smartphones made outside the US.

After weeks of de-escalation, the US President Donald Trump ramped up the trade war, threatening a 50 per cent tariff on European Union imports and 25 per cent tariffs on smartphones made outside the US.

While President Trump initially said the EU tariff was a “deal” that had been “set”, markets cheered on Monday after the US President agreed to delay the EU tariff start date from June 1 to July 9 after a “very nice call” from EU Commission president Ursula von der Leyen.

S&P 500 futures rose 1 per cent in holiday-affected trading.

US and UK markets will be closed on Monday for long weekend holidays.

Of course the 50 per cent US tariff on EU imports is still due to go ahead on July 9 and the tariff on smartphones that will be super-expensive to make in the US should be concerning enough.

Perhaps investors are getting too comfortable with President Trump’s brinkmanship on tariffs.

If Friday’s tariff announcements were made a couple of months ago, one might have thought the S&P 500 would have dipped more than the 1.3 per cent that was seen during Friday’s session.

Investors have grown to expect President Trump to cave in under pressure from financial markets.

The best example was the 90-day pause on “reciprocal tariffs” that was granted by President Trump on April 9 after a near meltdown in US stocks and bonds in response to the tariffs that were announced April 2.

To keep the “risk-on” party going, as per President Trump’s repeated tips to buy US stocks, his team promised a string of deals. The trade war de-escalation continued with a hastily-arranged “deal” with the UK – arguably the easiest party to deal with – and a 90-day trade truce with China.

The US-China trade truce saw a withdrawal of the extreme retaliatory tariffs that applied in April.

But the current situation is different. US Treasures and the dollar were under pressure last week. But there wasn’t the risk of a simultaneous meltdown in US assets that looked to be the case in early April when stocks were on the cusp of a “bear market” yet investors also shunned US Treasuries.

Long-term US Treasury yields remain near the danger zone in terms of putting upward pressure on mortgage rates and Team Trump is yet to achieve any fall in borrowing costs for the US government.

No doubt the “Trump put” (option) was activated on April 9 and to avoid a burst of inflation and possibly to keep stocks rising for a while. The Trump put remained active until May 12 when the US-China trade truce was announced. By May 19, the S&P 500 was on the cusp of a “bull market”.

But with the S&P 500 now 20 per cent above its April low, the risk is that President Trump’s priorities have changed from lending a helping hand to US stocks and bonds to actually prosecuting his trade war.

A 50 per cent tariff may be an ambit claim. Morgan Stanley says it would likely push the EU into recession.

But President Trump seems unlikely to agree to the zero tariffs regime that the EU is pushing. At the same time, the EU seems unlikely to drop its non-tariff barriers – its digital services tax, VAT tax or regulations on US agriculture imports. A damaging tit-for-tat trade war with the EU is a risk.

“This just speaks to the difficulty and the challenge of getting a trade deal over the line,” said NAB head of FX strategy, Ray Attrill. “I think it's months and months and potentially years in the making.”

Meanwhile, the risk is that economies and markets will pay a cost for trade policy uncertainty.

“How any business that’s trade-exposed or thinking they’re going to get a start a business in the US – because they’re going to get some kind of protection from international competition – is going to make a decision is beyond me,” Mr Attrill said.

Speaking after the latest US tariff threats, Chicago Fed president Austan Goolsbee said they were “really scary” for firms and that while rate cuts are possible over a 10-16 month horizon, the bar for rates to move in either direction is now higher.

According to Morgan Stanley strategist Michael Zezas, the EU would probably respond by doubling the scope of the already envisaged countermeasures on US goods worth about EUR130bn ($227bn).

“Importantly, this underscores that considerable uncertainty around US trade policy will endure, even if the full implementation of ‘reciprocal tariffs’ flagged on April 2nd has become less likely,” he said.