Why Trade Wars Will Unleash Central Banks

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by Nomi Prins, Daily Reckoning:

There’s been an abundance of coverage surrounding the recent steel and aluminum tariffs. Those measures could hurt more sectors than they help within the U.S. In particular, it could damage businesses that require metals because they’ll have to pay more for raw materials.

Trade wars also escalate geopolitical tensions and economic hardships the world over. They have in the past. When the U.S. imposed tariffs in the 1930’s to try to relieve the Great Depression at home, they achieved the opposite effect.

A global trade war flared, governments became isolated and initiated defensive build-ups. The move ultimately resulted in lower production, reduced global trade and a prolonged international depression that gave rise to WWII.

While the early Great Depression period in which President Hoover invoked harsh trade wars might be different than today, the threat of instability remains. What we saw then was a slowdown in the world economy that lead to regional aggressions and ultimately a world war.

The major differences now are that we have central banks financing markets — and by extension a military buildup.

Countries are better insulated today than they were in those days. By insulating themselves, they now have more choices about who their trading partners are, and what regional or multilateral agreements they enter.

That’s one reason China is championing regional trade agreements throughout Asia and the Pacific Rim, and inked bi-lateral deals with Japan and the EU last year. Those nations are growing less reliant on U.S. trade and, like good portfolio managers, are diversifying their trade partners.

The U.S. tariffs will likely accelerate this trend.

The tariffs, and super-regional build-ups, will also do something else. Trade wars will morph into an acceleration in global military spending. That’s because the tensions from trade wars have military ramifications.

When government allies are less connected by interdependent economies, they are more likely to act on their own domestic needs.

These divisions are potentially dangerous for the world. As major allies become untethered by mutual economic benefits, the world, from issues ranging from North Korea to Syria, continues to destabilize.

Before President Trump announced his latest tariffs, Mario Draghi, president of the European Central Bank (ECB), was asked about their impact on the global economy.

He noted while the “immediate impact wouldn’t be large” referring to the economic impact, he warned also, “there is a certain worry, or concern, about the state of international relations… because if you put tariffs against what are your allies, one wonders who the enemies are.”

It is true that Trump was targeting tariffs on places like China and South Korea, countries he believes are flooding the U.S. market with low-priced metals backed by government subsidies. Yet the fact remains that China accounts for less than 10% of all U.S. steel imports. That’s well behind U.S. import-heavy countries that are also allies, ranging from Canada and Mexico to NATO allies in the European Union.

Peter Navarro, maybe the White House’s top trade adviser, told CNBC “we come in peace here.” But embedded in the very basic trade principal is a military provocation that cannot be ignored.

The tariffs were characterized as necessary for national security reasons. As President Trump told a White House gathering of metals industry executives before he signed the tariff orders, “You’re going to have protection for the first time in a long time.”

He meant two things by that, the more logical of which was really economic protection, colored in military terms.

That’s why Mario Draghi’s position matters. By examining the real trade numbers among military allies in Europe and even Japan, the tariffs were clearly seen as economic protectionism, not as a security-related action.

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