Are We on the Verge of a Global Trade War?

It appears as though Donald Trump has started a trade war, and now there is no telling how things could shake out.

Is this a bad omen for the economy and the stock market?

Trump imposes tariffs on imported steel

Talks between Canada, Mexico, and the United States were already heating up, as the three countries sorted through negotiations on the recently reopened North American Free Trade Agreement (NAFTA).

And then U.S. president Donald Trump dropped the bombshell that he would be imposing a 25% tariff on steel imports and 10% tariff on aluminum imports to help struggling U.S. producers combat cheap imports.

Perhaps the result of a direct call shared between Trump and Canadian prime minister Justin Trudeau, the U.S. announced a few days later that both Canada and Mexico would be held exempt from the new tariffs for an initial 30-day “grace” period.

Some have speculated that the U.S. is using the steel tariffs as a negotiating tactic as part of the broader NAFTA negotiations, but Trudeau says the two are separate issues.

Probably the worst news to come out of this is now Canada is under threat of Chinese steel imports being “dumped” into the Canadian markets, which could lead to a domestic slowdown and layoffs for steel and aluminum workers.

And this says nothing of heightened tensions between the U.S. and Chinese officials over their own trade talks.

Tensions are rising between China and the U.S.

When the U.S. first announced the imposition of tariffs on steel and aluminum imports, Chinese vice foreign minister Zhang Yesui responded by saying the country “does not want a trade war with the United States” but warned it will “not sit idly by and watch China’s interests being harmed.”

The U.S. and China are the two largest economies in the world.

Without making a prediction as to how things will shake out, a trade war that would see both countries stamping additional tariffs on imports would unquestionably raise prices for buyers in their domestic economies and would not be a welcome development for the markets.

And don’t forget that 2018 marks the ninth year of the current bull market — meaning that stocks like Bombardier, Inc. (TSX: BBD.B) and Corus Entertainment Inc. (TSX: CJR.B) right now are even more sensitive to “bad news” than they otherwise would be.

The E.U. is getting in on the action, too

In response to the U.S. tariffs, European commission president Jean-Claude Juncker says he has identified certain products as targets for “counter measures” by the E.U.

The E.U. is now planning its own set of tariffs on products ranging from motorcycles manufactured by Harley-Davidson Inc. (NYSE: HOG), bourbon made by Brown-Forman Corporation (NYSE: BF.A), and denim jeans made by Levi Strauss.

Bottom line

When the E.U. announced its retaliatory response to the U.S. tariffs, Levi Strauss issued a statement: “We support open markets and free trade where everyone plays by the rules; these measures will not only hurt American brands and workers but also have reverberations across the global economy.”

A trade war isn’t going to be good news for anyone, except maybe the “bears.”