There is a good chance most of you will have seen Walt Disney’s classic 1940 animation film Fantasia, which contains a very famous segment called ‘The Sorcerer’s Apprentice’. You may well already be humming the music. The story, if you recall, involved a magician’s apprentice who was so keen to emulate his master that he set a spell upon a broom to carry buckets of water. The only trouble was he did not have the magic to know how to stop it. Potential disaster was on the cards.
This memorable piece of film works as a parable, warning us of what happens when we get involved with something that swiftly gets out of control … which brings me nicely to the subject of tariff traumas. The US president can often appear a simple soul – in that his attention level may seem somewhat transient and he can easily be distracted to another subject, especially if it casts him in a flattering light.
By way of example, we can look at his understanding of import tariffs. As far as he was concerned, these were very damaging to the US – and, in certain areas, he has been quite right to highlight some unfair practices and costs – and that by increasing the tariff charges on certain imports, the US would suddenly see a surge of extra money coming in. He was boasting about huge sums benefitting the country’s budget – and, in the short term, he will be right.
The topic of tariffs does not end there, however – and neither does it end with the counterpart in the trade slapping on extra duties on goods going the other way. This, then, is where the Sorcerer’s Apprentice – aka Donald Trump – finds he cannot control the knock-on effects of his excitable but ill-judged actions.
And thus, flipping his own television series The Apprentice, the Donald is now less judge than judged. He had better be careful though because, while in Fantasia the apprentice was played by Mickey Mouse, the US president might find his part turning into a caricature played by his namesake – a certain duck.
When in doubt …
So, what are the issues the Apprentice appears not to have considered here? The biggest impact of any tariff trouble is that it upsets the current trading systems and will erode confidence of companies, countries and consumers as they cannot be sure what is going to happen next.
Best then to adhere to that crucial rule: when in doubt – stop! In essence tariff trouble will lead to trade disruption and if it is not addressed swiftly, a slowing or weakened economy can find itself going into recession. The net result is that all parties end up earning less from their tariffs as the trade on which they are based has dramatically slowed down.
The president would then have to realise that, although raising tariffs did initially give the US an extra boost of short-term monies from higher duties, the knock-on effect could reverse any such gain and in fact make things far worse.
Of course, by this stage his attention will likely have been caught by the next fleeting topic or profitable deal – which, by the way, might have been that astonishing order for hundreds of Boeing aircraft. (Incidentally, I could not help noting the share price seemed to rise significantly ahead of his visit to Saudia Arabia and any mention of such an order. You might almost think somebody had an idea of what was going on.)
Economic complacency
Anyway, at the risk of being more controversial, I would argue Trump has been right to shatter the economic complacency that seemed to be accepted around the globe. There are very serious areas that need addressing and it would have been far easier to let things just amble along.
After all, we have dangerous military conflagrations, many nervous consumers as seen in the US’s consumer confidence data, high levels of debt, Moody’s downgrading the quality measure of US debt – thus increasing its costs – and some lurking inflation to be managed.
Having a president challenging the ‘norm’ has therefore brought a shock to much of the globe – but now is the time for some calm and for some clear minds to settle the economic nerves. As part of this we need to have China working with the US to manage their trade issues as their economy is also showing significant signs of weakness, and a tariff war now would damage us all – especially, in fact, China, which already has ships laden with containers of its consumer goods struggling to find a home, as orders are already being delayed or even cancelled.
So, President Trump needs to be careful as today’s crowing about all this extra tariff income could easily morph into tomorrow’s recession. A recession is not certainty, of course – however its chances are increasing if the tariff tantrums continue. What is needed is for all parties to agree to new acceptable levels and that vital word is brought back into our economy – confidence.
China and the US are in a symbiotic relationship – they may argue and disagree but they need each other. After all, who is China’s largest customer? The US – and the US needs China to keep buying its burgeoning debt. Time then for egos to be reined in and common sense to prevail – and, please, can someone take the broom away from the new Apprentice before he does any more damage.
Co-founder of Seven Investment Management and the Regionally Ventures investment service – not to mention a driving force behind Barclays Stockbrokers, Proshare and AIM – economic commentator Justin Urquhart Stewart is the keynote speaker at Wealthwise’s June Wealth Forum, which takes place at Coworth Park, Ascot on 26 and 27 June. For more information on the event, please click here
“The net result is that all parties end up earning less from their tariffs as the trade on which they are based has dramatically slowed down.
