In June 1930 there was chaos on the streets of Rome, Milan and Turin.
A fury had descended on the Italian people.
And according to reports from the time, they vented their spleen by attacking American-made cars on the streets of their cities.
Why such wrath?
From supporting farmers… to all-out trade war
The Italian public was reacting to harsh measures put in place by the US government to protect its industries.
President Herbert Hoover had just signed what’s now known as the infamous Smoot-Hawley Act.
A couple of years earlier, on the 1928 presidential campaign trail, Hoover had pledged an agricultural tariff to support American farmers.
At the time, an oversupply of grains had caused global prices to plummet. US farmers were feeling the pinch.
Hoover’s carrot-dangling worked on voters.
His campaign promises to protect agriculture led to his landslide victory.
And as President, he pushed the tariff through.
But all sorts of other tariffs had been added to the Bill as Congressmen sought to protect the respective industrial interests of their states (and win political support).
So, what started out as a light tariff to support US farmers turned into the most extreme protectionist measures in US history.
It led to an average import tax of 52.8% which was devastating to America’s overseas trading partners.
The effect it had on European businesses and the livelihoods of its citizens led to the kind of uproar seen on the streets of Rome.
And then came the tit-for-tat backlash from other nations…
Furious with America’s actions, countries across the world retaliated with their own tariffs.
Not just on US imports. But on their nearby neighbours, too, as they fought to protect their own economies.
“Within two years some two dozen countries adopted similar “beggar-thy-neighbour” duties, making worse an already beleaguered world economy and reducing global trade. U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect.”
We’re talking all-out international trade war, with more than 60 countries involved.
Fuelling the Great Depression and World War II
All this had devastating effects on not only the US economy but the whole global economy too.
Back then memories of the Wall Street Crash of 1929 were still raw.
And on its heels came the Great Depression.
Economists are split on how much petrol the Smoot-Hawley Act poured on that particular fire.
But the consensus is that it didn’t help.
And that the destruction of world trade deepened the downturn… and led to world war.
Forbes magazine explains it:
“The global trade wars that followed the harsh tariffs imposed by the Hoover administration in the early 1930s following the stock market crash of 1929, deepened the trough of the Great Depression. Worldwide economic hardship led to political restructuring and eventually to World War II.”
Since the Second World War, things have generally been smooth on the world trade front.
A few spats here and there over the years.
Like the 1973 OPEC embargos that reminded America that it needed imported oil.
Then there were George W Bush’s steel tariffs in 2002.
Those ended up with the World Trade Organisation getting involved after Europe complained. The WTO forced Bush to scrap the tariffs.
Nothing far-reaching, though.
Nothing like 1930.
But with Donald Trump’s latest threats of tariffs on Chinese imports, the idea of a global trade war is back on.
Marching towards a new Global Trade War
On Thursday, Trump announced 25% tariffs on $50 billion worth of Chinese exports to America.
China’s response was swift. It announced tariffs on $3 billion worth of imports from the US.
Cue the deepest stock market sell-off in six weeks.
The S&P 500 lost 3%. And Asian and European markets followed suit.
Meanwhile, gold spiked higher.
OK it wasn’t a massive move. Just $25 or around 2%.
But it’s a clear display of the nervousness in the markets due to these trade issues.
If this thing escalates, gold and silver could well see a flood of scared money pour in.
And there is plenty of scope for this spat to get out of hand…
Trump’s latest move was in response to China’s alleged theft of US intellectual property.
But when he announced the tariffs, he said that the $50 billion of imports from China is “really just a fraction of what we’re talking about”.
In fact, United States Trade Representative, Robert Lighthizer, recently conducted a seven-month investigation.
He found China’s IP theft currently costs between $225 billion and $600 billion annually.
Which suggests Trump’s likely to go after more.
China and Europe prepared to play tough
By the way, these latest tariffs are on top of Trump’s tariffs on imported steel and aluminium announced at the beginning of March.
And just as back in 1930, America’s trading partners aren’t going to take it lying down.
For example, European leaders have warned Trump that they’ll give as good as they get if he sparks a trade war…
Jean-Claude Juncker, President of the European Commission, warned:
“If the Americans impose tariffs on steel and aluminium, then we must treat American products the same way. We must show that we can also take measures. This cannot be a unilateral transatlantic action by the Americans… We will put tariffs on Harley-Davidson, on bourbon and on blue jeans – Levi’s…”
And China’s not backing down, either.
OK, you’ll have read in the media this weekend that Beijing’s bending over to avoid an escalation in tensions.
China’s Premier Li Keqiang wants to “maintain negotiations”, say some of the reports I saw.
And US Treasury secretary Steve Mnuchin said he’s ‘cautiously hopeful’ that the two superpowers will reach an agreement.
All of which helped the Dow Jones recover a decent chunk of last week’s 1,300-point sell-off.
But at the same time, China’s leaving the door open for a scrap if America wants to play tough. Beijing is “ready to defend its interests”.
We’ve not heard the last of this…
So, what do you think?
Is Trump going to give up his rhetoric that easily?
Has he done enough to get the concessions and deals he wants?
Or is there more to come?
Just consider that Trump’s been banging the drum for ‘fairer trade deals’ for America for years. Since way before he took office.
He hates the WTO.
He believes it’s been great for lots of countries (including China) but not good for America.
So, it’s been a long-term goal to make things better for the US.
Now that he’s running the country, he wants to see it through.
He’s going to want far better access to China’s markets.
Perhaps far more than Beijing’s prepared to allow.
That could mean Trump ups the ante and rhetoric again.
And then consider that Trump’s steel and aluminium tariffs will have little effect in terms of making a stronger America.
It’s too small a part of the economy…
Which means he’s going to need to do more.
He’s going to want to slap tariffs on a wider range of Chinese exports.
In other words, Trump’s actions so far could be just his opening salvo.
His next move could be to punish China for violating American intellectual property rights by banning Chinese investment in US technologies.
At the same time, China also has plenty more in its arsenal, should it want to hit back at Trump.
Two of the biggest US exports to China are soybeans and its Boeing aircraft.
If China decides it wants to hurt Trump some more, they’ll look to apply painful tariffs right there.
So, let’s not get too comfortable here.
The threats of a global trade war haven’t gone away, despite what you read in the press.
America and China are feeling their way right now. To see what they can get away with.
It’s possible (likely even) that someone’s going to make the wrong move and upset the other.
And that could lead to an escalation in tensions… and all-out trade war.
What does that mean for us as traders and investors?
We can expect more volatility in the stock markets, that’s for sure.
700-point moves on the Dow are the stock answer from the market whenever something new comes out to suggest the trade war is on/off.
If Trump goes all out and ratchets up his protectionist actions, things could get very ugly.And check out how the tech sector reacted a few days ago…
The Other War
Big technology stocks are already reeling from the negative attention brought on them by Facebook’s data sharing scandal.
And that sell-off intensified yesterday.
With news that Trump’s considering blocking Chinese investment in US technologies, the Nasdaq 100 tech index fell 3.3%, dragging the main market with it.
Right now, stock markets across the board are feeling the threat of a trade war. That could intensify.
And tech stocks are taking the brunt of it.
Facebook’s under attack for allowing a Trump-affiliated firm, Cambridge Analytica, to access the private data of 50 million users.
And that’s tarnishing the whole sector – especially anything connected with harvesting and marketing user data.
Facebook is the one getting all the bad press.
But there are plenty of other disruptive tech companies that have become successful off the back of harvesting and sharing information about we, their users.
Without our data, these businesses will die.
And now there’s a backlash.
The Facebook/Cambridge Analytica story has focused people’s attention on how their privacy is under attack.
That’s potentially bad news for companies that depend on data, from social media firms, to online retailers to credit rating companies.
But this war on big data tech companies could be good news for investors in certain crypto assets.
That’s because the technology that cryptos are build on, the blockchain, has the potential to cause huge disruptions to the data industry.
You might think of blockchain being about Bitcoin and Ethereum and other payment systems.
But as we’ve seen before, blockchain can be applied to virtually any industry.
Mark Walport is chief executive of UK Research and Innovation and formerly the UK government’s Chief Scientific Adviser.
In 2015 he wrote a report called Distributed Ledger Technology: beyond blockchain. And in it he made an interesting point that explains how blockchain could help. He said:
“For the consumer… the technology [blockchain] offers the potential, according to the circumstances, for individual consumers to control access to personal records and to know who has accessed them.”
In other words, by managing our data on a decentralised blockchain, that data can be owned and controlled by the users.
So, there is no centralised party (e.g. Facebook) which has access to all our data.
Instead, the owners of the data (e.g. you and me) can choose who gets to access that data.
Even better, we can get paid for it… rather than the multi-billion-dollar social media company taking our personal details and selling them on to the highest bidder.
Keep an eye out for this use of the blockchain.
With all the animosity towards big tech companies lately, I think we’re going to be hearing a lot more about this…
I’ll be back next soon – have a great long weekend.