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A trade war is a risk, but not the biggest risk

The U.S. tariff on steel and aluminum has generated fear among investors, but what the financial market fears the most is not necessarily the greatest risk.

The first thought I have regarding the tariffs is in line with the general consideration among investors, namely the risk of an escalation into a genuine trade war.

It certainly is worrying that President Donald Trump’s senior economic advisor Gary Cohn and U.S. Secretary of State Rex Tillerson have been fired. Clearly, the hawks around Trump have won the internal battle, so the world can expect more thunder via tweets from the White House.

This is not equal to a trade war, but the risk for an escalation is increasing.

The U.S. steel tariff serves at least two purposes. As graphic one shows, it is China, the EU and South Korea that the United States intends to hit.

But my consideration is whether the U.S. government is right with the claim that the global WTO agreement regulating import duties is obsolete.

The agreement was last renegotiated in 1994 i.e. for approximately 25 years ago and one has to keep in mind how the world looked like then.

The whole bloc around the Soviet Union had collapsed economically, and therefore the United States had a security policy interest in an economically strong Western Europe.

For this reason, the United States may have granted the EU a number of benefits at its own expense back then.

Several analyses I have seen point out that the EU has significantly more advantages from the WTO agreement than the U.S. has. For the same reason, I see it as an increasing probability that a renegotiation could be a reality. The three major economic zones: EU, U.S., and China would under new negotiations, protect their most important business sectors the most. Conversely, there is a risk that some minor sectors may be sacrificed.

Now it is far from certain that there will be a renegotiation of the WTO agreement, but as mentioned, the possibility is increasing.

Trump’s new import tariffs also has a domestic angle, or political mission so to say.

The mid-term elections on 6th November are coming closer and everything concerning steel is closely linked to the areas with Trump’s core voters.

The potential escalation towards a trade war partly depends on how

WTO confirms that global trade is still in a healthy development. Last month, the organization released its “Outlook Indicator” at index 102.3 which is “growth above trend”. Based on this reading the organisation concludes that global GDP growth will also be cheerful in Q1.

But still, a growing number of countries are trying to boost the GDP growth via public spending, including Asia’s three largest economies.

My concern is that many countries increasingly try to shield their growth by initiating more public investment, but at the same time it increases the risk of unhealthy growth. I pay attention to this development as this kind of GDP-growth is not necessarily an argument for higher share prices.

The U.S. tax reform was a true reform, but it probably loses the positive GDP growth effect after 1½ year. Afterwards, the country is burdened by an even higher government debt that will dominate the economy and limit the flexibility.

Despite increasing public investment, the Philippines is one of the few countries that appears to continue the reform process for several years ahead – I argue that this is one of more reasons why private consumption in the Philippines will move the economy forward the coming years.

The final way for investors to maneuver is of course to have an increased focus on sectors that do not produce goods.

It is of course service sectors and they grow as shown in graphics two.

This shows the value of global export services, but converted into a relative comparison then, service now accounts for almost 25 pct. of global exports.

The sectors with the highest growth are the travel industry, IT and web-based service and telecommunications, where my fondness is for IT and web-based service.

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