Competence matters

Daily update

Asian equity markets crashed, with Hong Kong markets down over 10%. Over the weekend, US administration officials gave contradictory statements on trade taxes, causing investors to question the existence of a masterplan. Attempts to justify attacks on the Heard Island penguins only emphasized the peculiarity of the tariff formula. US President Trump took time from their golf weekend to twice post that equity declines were “on purpose”.
Investors had assumed Trump’s trade taxes were a bargaining tool, as during the first term. That depends on competent policymaking to balance the benefits of trade negotiations against the damage of tariffs. If the competence of policymaking is questioned, markets will worry that economic damage will be lasting.
The EU is expected to unveil tariffs today; media reports suggest USD 28bn. This tax is paid by EU consumers, but only on US products (not all imports). Unlike the 1930s, this is not a global trade war. China and the EU (for instance) have less incentive to engage in trade hostilities as a result of US policy.
Financial markets’ pricing increased risk of a US recession and a global growth slowdown is appropriate. More than that would suggest disorderly markets. As with the UK’s Truss debacle, disorderly markets would require some kind of policy response.