US President Donald Trump touched down in the UK for a NATO summit on Tuesday morning. As is often the way, Trump has taken control of the news agenda and brought issues that he wants to discuss during his visit to the fore. In this instance, his arrival coincides with increased trade tariffs on a range of countries, including Brazil, Argentina and France. The fanfare that welcomes him is of concerned trading partners and risk-heightened investors. For the domestic US audience, which is winding up for presidential elections, Trump is leading on the issue of unfair trade practices that penalise the US.
The new levies mark a shift away from the trade dispute between the US and China that has dominated the 2019 economic climate. The proposal will instead target countries that are traditionally on better terms with the US. The hike in charges on French high-end fashion items and cheese will certainly provide a topic of conversation when President Trump meets with his French counterpart Emmanuel Macron over the next few days.
Monday’s announcement of levies on Brazilian and Argentinian products has been triggered by the perception in the US that those countries are manipulating their currencies to gain an unfair advantage on their exports to the US. The currency shift in the Argentinian peso-USD forex pair is indeed substantial.
USDARS – One-year price chart
There is little reason to suggest that this was engineered, or even welcomed, by the Argentinian administration. The move follows October’s change in government from the incumbent PRO party to a new and potentially less business-friendly Justicialist Party. The forex move reflects the markets pricing in the changing probability of sovereign debt default.
The immediate restoration of tariffs on steel and aluminium won’t bring about a re-run of the general election, and any attempt by the Argentinian government to inflate the value of the peso would appear to be doomed to failure. The most that the US could hope for is that the tariffs nudge the new regime towards allaying the fears of US lenders. This move, then, looks like it has the presidential election of 2020 in mind. It’s an easy chance to stand up for industries in marginal states against countries with little opportunity to retaliate. President Trump’s tweet said:
“Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries.”
The threat of new tariffs on French goods is slightly different in nature. In October 2018, tariffs of 25% were imposed on a variety of French products such as wine and olives. This move was approved by the World Trade Organisation due to EU subsidies for Airbus (EPA:AIR) being found to be discriminating against US aero-industry interests.
Monday’s move stems from concerns that the US administration has regarding French moves against US tech giants. France’s new digital tax would see a 3% levy applied on revenue from digital services earned by firms with more than €25m ($27.8m) in French revenue and €750m ($830m) worldwide. Monday’s proposals demonstrate a significant scaling up, with new rates of 100% proposed for $2.4bn of goods such as champagne, luxury fashion and cheese.
New taxes on tech giants are being considered by countries other than France, but Macron’s administration is the first to outline concrete proposals. The targeting of companies that are in the main US-owned offers Trump a chance to demonstrate how serious he is about standing up for American interests abroad. Senators Charles Grassley and Ron Wyden, the top Republican and Democrat, respectively, on the Senate Finance Committee, said in a joint statement:
“The French digital services tax is unreasonable, protectionist and discriminatory.”
The size of the ‘Big Tech’ firms makes them easy targets for governments looking for new income streams. The 100% tariff on Gruyère cheese demonstrates that the US is willing to do what it needs to do to ensure that the tax gain falls in the US rather than any other country. German and UK political parties have also made noises about taxing big-tech but will take Monday’s announcement by the US as something of a shot across the bows.
Does opening up new fronts in the trade war suggest that the US is quietly confident of some kind of a deal with China being confirmed soon? Surely, it would be foolhardy to scale up the aggregate level of international tension in an election year. It’s a high-stakes question, as once the will-they-won’t-they question regarding the US and China is finally answered, the markets can be expected to take on significant moves to the upside or downside.
Traders may well be waiting to see how the situation develops before scaling up on risk on the assumption that the US and China have found an agreement. There are stand-alone reasons for the proposed tariffs against France, Brazil and Argentina. The move plays to the domestic US audience and highlights justifiable claims that the US faces unfair trade practices. It provides a diversion from the tricky subject of NATO negotiations and supports the big US tech companies abroad – with the intention of taxing them at home.