TRADE WAR BEGINS! BUT REALLY ITS AN INVESTMENT CAPITAL WAR: It has been said that a trade war is simply a war by other means. As America and China have launched a trade war in earnest (Canada is largely collateral damage) I’d like to use this update to discuss some macro fall-out Canadian investors should consider. First some fundamentals – a kinetic war is inflationary and requires industry and commodities. The trade/capital war the US has initiated will have similar effects.
While the opening salvo has been tariffs, it’s critical to note that tariffs themselves are not the end-goal of the US strategy. Tariffs are merely the first step in the roadmap the administration believes will force more of the world’s finite pool of investment capital to flow to the US to facilitate re-industrialization. The reason for both the extreme nature of the measures and their urgency is that the US government has suddenly remembered that military power is downstream of industrial power and therefore US global military hegemony is on an increasingly insecure foundation after decades of de-industrialization. Given this national security underpinning, expect the drive to re-industrialize to be top of US priorities for the foreseeable future.
While re-industrialization makes sense, the needed adjustments will be severe – for US trading partners and for US citizens. To reindustrialize, America will have to consume less, save more and cannibalize investment capital from its trading partners’ economies. That is why at the same time the US is imposing tariffs on the world, it is attempting to drive down domestic energy costs, reduce capital and income taxes, reduce regulatory barriers and without saying it too explicitly, reduce domestic discretionary consumption. The US has a holistic strategy both to increase the pool of domestic savings and attract the foreign investment capital needed to fund the reconversion of the US economy from its consumption/services focus back to a production focus.
Unfortunately for Canada, if successful, this is likely to worsen our stagflation problems in the short to medium term. Stagflation is a challenging combination of rising inflation and stagnant growth, resulting in flat or even negative real GDP per capita. Do not think of our current stagflation as an analog of the extreme 1970s event, think of it as more akin to persistent above trend inflation and persistent below trend growth – milder but more protracted (at least for the time being).