There should be no surprise that President Trump has launched his trade war with China.  The real surprise is that financial markets, and business leaders, are so surprised it is happening.  He was, after all, elected on a platform that called for a trade war, as I noted originally back in November 2016 – and many times since, even just last month.

Nor is it a surprise that China has chosen to target chemicals in its proposed list of products for retaliation. As my colleague John Richardson has noted:

“On Tuesday, China’s reaction to that first round of $50bn US tariffs included proposed tariffs of 25% on US exports of low and linear-low density polyethylene.  The same tariffs could also be levied on US polycarbonate, polyvinyl chloride, plastic products in general, acrylonitrile, catalysts, lubricants, epoxy resin, acrylic polymers, vinyl polymers, polyamides (nylon) and surfactants.”

China, unlike almost everyone else it seems, has used the past 15 months to prepare for Trump’s trade war.  So they are naturally targeting the chemicals industry – which was a great supporter of Trump in the early days, and has also come to depend on China for much of its growth.

They will have seen this December 2016 photo of Dow Chemicals CEO, Andrew Liveris, joining Trump at a victory rally in Michigan.

They will also have read Liveris’ tribute to the new President, when announcing the opening of a new R&D centre in Michigan:

“This decision is because of this man and these policies,” Mr. Liveris said from the stage of the 6,000-seat Deltaplex Arena here, adding, “I tingle with pride listening to you.”

The fact that Liveris stepped down last year as head of Trump’s manufacturing council will also have been noticed in Beijing, but clearly did not change their strategy.

FINANCIAL MARKETS EXPECT THE  FED TO BE A FAIRY GODMOTHER
Industry now has a few weeks left to plan for the inevitable.  But if history is any guide, many business people will fail to take advantage of this narrowing window of opportunity.  Instead, like most investors, they will continue with “business as usual”.  The problem is simple:

  • A whole generation has grown up expecting the central banks to act as a fairy godmother
  • Whenever markets have moved downwards, Fed Chairmen and others have showered them with cash
  • Therefore the winning strategy for the past 20 years and more has been to “buy on the dips”
  • Similarly, industry no longer bothers with genuine scenario analysis, where bad things can and do happen

Another key factor in this developing drama is that not all the actors are equally important.  China seems to have been initially wrong-footed, for example, by placing its trust in Treasury Secretary, Steve Mnuchin, and US Ambassador to China, Terry Branstad, to argue its case.  They might appear on paper to be the right people to lobby, but at the end of the day, they are simply messengers – not the ones deciding policy.

The key people are the US Trade Representative, Robert Lighthizer, and his aide, Peter Navarro.  They are now being joined by arch-hawk John Bolton, who in his role as National Security Advisor can be expected to play a key role – along with newly appointed Secretary of State, Mike Pompeo.   Like everything in the Trump White House, Lighthizer’s power comes from his relationship with the President, as the Wall Street Journal describes:

“To Mr. Trump, Mr. Lighthizer was a kindred spirit on trade—and one who shuns the limelight. The two men, who have a similar chip-on-the-shoulder sense of humor, bonded. Mr. Lighthizer caught rides to his Florida home on Air Force One. Mr. Trump summons Mr. Lighthizer regularly to the Oval Office to discuss trade matters, administration officials say.

THE NEXT 6 MONTHS WILL BE A WAKE-UP CALL FOR MANY
The past 18 months have in many ways been a repeat of the 2007-8 period, when I was told my warnings of a subprime crisis were simply alarmist.  This complacency even lasted into October 2008, after the Lehman collapse, when senior executives were still telling me the problems were “only financial” and wouldn’t impact “the real world”.

Similarly, I have been told since September 2015, when I first began warning of the dangers posed by populism in the US and Europe, that I “didn’t understand”. It was clear, I was told, that Trump could “never” become the Republican candidate and could “never ever” become President – and if he did, then Congress would “never ever ever” allow him to take charge of trade policy.  Similarly, I was being told in March 2016 that the UK would “never” vote for Brexit.

I also understand why so many friends and colleagues have been blindsided by these developments, as I discussed in the same September 2015 post:

“The economic success of the BabyBoomer-led SuperCycle meant that politics as such took a back seat. People no longer needed to argue over “who got what” as there seemed to be plenty for everyone. But today, those happy days are receding into history – hence the growing arguments over inequality and relative income levels.

“Companies and investors have had little experience of how such debates can impact them in recent decades. They now need to move quickly up the learning curve. Political risk is becoming a major issue, as it was before the 1990s.”

TIME TO DEVELOP PROPER SCENARIOS ANALYSIS
Nobody can forecast everything in detail over the next 6 months, let alone the next few years.  And it is very easy to mock if one detail of the scenario analysis turns out to be wrong.  But the point of scenario analysis is not to try and forecast every detail.  It is instead to give you time to prepare, and to think of alternative strategies.

Just imagine, for example, if you had taken seriously my September 2015 warning about the rise of populism:

  • Think about all the decisions you wouldn’t have made, if you had really believed that Trump could become President and Brexit could happen in the UK?
  • Think of all the decisions you would have made instead, to create options in case these developments occurred?

I understand that you may worry about being mocked for being “stupid” and “alarmist”.  But you should simply remind the mockers of the lesson learnt by insurer Aetna’s CEO, from his failure to undertake proper scenario analysis, as he described in November 2016:

“When Aetna ran through post-election expectations, the idea that Donald J. Trump would win the presidency and that Republicans would control both chambers of Congress seemed so implausible that it was not even in play.  We started with a fresh piece of paper yesterday — we had no idea how to approach it. What we would have spent months doing if we thought it was even remotely possible, we had to do in a day.” 

There is no doubt that he was the one feeling stupid, then.

 

 

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