Is The Trade War Going Into Overdrive?

Even before the G7 summit began in Canada, tensions amongst the parties were running high. Directly prior to the summit, the US government made the decision that it would not continue its tariff exemption on allies like Canada, Mexico and the EU, effectively creating new tariffs for these countries. Combine this with the combative tendencies of US President Donald Trump, and there was always the strong possibility that fireworks would erupt.

And erupt they did, beginning with the US President’s decision not to endorse the joint statement that the G7 nation leaders had negotiated at the summit.

Then began a war of words between the US President and his host, Canadian Prime Minister Justin Trudeau. After the conclusion of the summit, just as he was preparing to leave for his historic trip to North Korea, the President lobbed one of his twitter hand grenades. Trump accused the Canadian Prime Minister of being “dishonest & weak” as well as making “false statements”. He further stated that Trudeau "acted so meek and mild during our G7 meetings only to give a news conference after I left saying that, 'US Tariffs were kind of insulting’ and he 'will not be pushed around’."

The reason for these remarks was clear. President Trump's was reacting to the post-summit press conference held by Prime Minister Trudeau, where he reiterated his criticisms of the US fiscal policy, in particular the US justification of imposing the steel and aluminum tariffs. Trudeau further promised that Canada would impose its own tariffs in retaliation, tipping the US president over the edge, who responded with the claim that “Our Tariffs are in response to his of 270% on dairy!”.

While the G-7 Summit certainly had its share of fireworks, in fact, the broader context of this spat shows that the Canadian and US tariffs are more a continuation of previous attacks. Prior to the G7 summit, after the tariffs decision in May, European Commission President Jean-Claude Juncker called the tariffs "unjustified", and promised countermeasures. Mexico also promised retaliatory tariffs to the US position.

What the G7 summit does show is an escalation of the US trade wars. Earlier last week the US President enlarged his tariff ambitions, instructing his US trade representative to find $200 billion worth of Chinese goods for additional 10% tariffs.

What started in May and spilled over to the G7 summit may now have reached its critical point, with the sign that the two largest economies are going toe to toe on trade tariffs. Markets reacted swiftly, with the Dow Jones Industrial Average declining 300 points the day after the announcement.

But was the G-7 summit the tipping point? From the beginning of his term, the US President has vowed to close as many import doors in an attempt to shore up US jobs. While there was a chorus of economists predicting doom for this strategy, the President has pushed on with this decision, pressuring countries and raising tariffs.

Despite the aggressive statements from world leaders, many commentators have downplayed the risk of an all-out trade war. Notable names like Warren Buffett, Jim Cramer and several others prominent US investors have described the moves in pragmatic tones. "I would call it more of a trade irritant than a real trade problem," said billionaire Hedge fund manager Paul Tudor Jones, suggesting that Trump is simply looking to “normalize the tariffs”. He states, “If we just look at our four biggest trading partners, they have a simple weighted average tariff of about 6%, we have one of 3.5%. So there is a 2.5 % gap in unfairness." Warren Buffett was also optimistic, saying that "I don't think either country will dig themselves into something that precipitates and continues any kind of real trade war”.

With the world's largest economies threatening each other with tariffs and a US President determined to “normalize the tariffs”, it certainly feels like the trade war has moved into overdrive.