After a tumultuous week, which effectively brought the curtain down on global trade it is impossible not to draw parallels between the defiant US worldview and Brexit. Both nations believe that to a smaller or larger extent cooperation with other nations is more harmful than beneficial (and there is a growing number of countries subscribing to this point of view). Irrespective of what statistical evidence, data, stock market performance or exchange rate movement insinuate, supporters of isolationist movements will never be convinced that globalization makes life less uncertain and more enjoyable. Equally, opponents will also display undisputable bias and will argue that nationalism, political and economic, hardly carries any benefit.

The last two months made it abundantly clear that the US, or at least its political elite, is confident of the country’s might to stand on its own feet without actively working together with former allies, a modern age autarky. As it is exiting the world and becoming ever so inward-looking, it does not seem worried about the emerging red flags: the brain-drain the cut in research funding causes, or the decimation of government departments, which, in the medium to long-term will lead to lack of innovation and will cause economic harm. Whether this confidence is the synonym for complacency will be answered in the coming months but after launching a full-blown trade war last week the signs are ominous.

It is anyone’s guess what the motivation behind the trade tariffs are, the US Administration’s most trusted, and even exclusive method of settling disagreements and making amends for perceived past mistreatment. It is possibly the combination of seeking leverage, reducing trade deficit and maybe even returning to the late 19th – early 20th century economic model where income tax was basically non-existent, and tariffs were the most significant source of government revenue. Whatever the reason, in the 21st century punitive measures on trading partners have not been well-received by markets. In fact, one might even say that history repeats itself, as the Smoot-Hawley Tariff Act in 1930, which raised excise duties by an average of 20% on 20,000 imported goods to protect the domestic market from competition, significantly contributed to the ensuing stock market crash. Last week equities were pushed over the precipice. Global stocks plunged 8% only to be outdone by the US stock indices. S&P 500 index, for example, plummeted more than 9%. The rout continues this morning.

Only this time around the announced tariffs are considerably higher. The formula to calculate them is more than perplexing. It is the half of the ratio of the trade deficit divided by the imports of any given country. It has nothing to do with existing tariffs, therefore calling them reciprocal is misleading. Smaller and poorer nations, whose export to the US significantly exceeds their import from it are disproportionately hit. Vietnam, for example, will suffer from a 46% tariff compared to the EU’s 24%.

As noted in Thursday’s report the US charged comparatively low import tariffs, and the latest manoeuvre is meant to rectify the imbalance. This logic, a great number of economists argue, is flawed. Firstly, the US trade deficit is the result of the difference between savings and investment spending and cannot be narrowed by punitive measures. Around 50% of US imports are input goods, which are used to produce the end products. Import tariffs, therefore, will raise the cost of production with knock-on effects on the labour market, inflation and competitiveness. Additionally, because the majority of trading partners are impacted the US leverage has been significantly compromised, unlike during the first Trump administration when Chinese imports were replaced, at least partially, by other countries.

The fall in stock prices was a brutal manifestation of the impact of tariffs. Anxiety about recession and stagflation has grown considerably and oil prices were not inoculated by the souring of investors’ sentiment. The two major crude oil contracts dived 10% last week. It will be interesting to see if this pessimistic view on economic prospects is acknowledged in the updated monthly supply-demand balances released by the EIA tomorrow, by OPEC on April 14 and by the IEA on April 15. What is, however, noticeable is that US oil and natural gas imports were exempted from the tariffs, and it exacerbated the selling pressure on Thursday and Friday. According to Vortexa, around 1.5 mpd of crude oil would have become more expensive for US refiners without this immunity. When you add to that last Thursday’s second bombshell, the OPEC+ announcement of releasing three times as much oil to the market in May than originally planned, the daily drop of almost $5/bbl seems conservative. It entails a reduction of $2.30/bbl in the Saudi official selling price to Asia for May. Whilst the revised unwinding is not exactly a gamechanger, especially if compensation plans from disobedient members are adhered to, one cannot help but think that either the unity within the group has frayed or some kind of clandestine agreement between the US and OPEC is to blame for the unexpected move. After all, Mr Trump sees cheap energy as part of the calculus to mitigate the inflationary pressure precipitated by tariffs.

So, what to expect? Hopefully, it is not far-fetched to believe that the trade war, in its current form, is unsustainable. Admittedly, it is more of a speculation than thorough research, but something or someone will have to give. The inertia, displayed by Europe in allowing 4 weeks to counter is probably rooted in the region’s reliance on US military power against Russia. China, on the other hand, understandably upped the ante by imposing 34% additional import duties on all American goods from April 10. US voters, both in red and blue states, might put pressure on the administration through their elected representatives if or when economic headwinds materially impact their lives and pragmatism overtakes ideology. Will the economic acolytes cave tacitly or otherwise? It cannot be reassuringly predicted but they have lost an enormous amount of political capital and credibility in the last few days. It is a disturbingly and unnecessarily dysfunctional world shaped by massive egos, and one can only pray that apparent lack of checks and accountability will prove just a temporary phenomenon. Otherwise, even if history just rhymes and does not exactly repeat itself, the consequences of the Great Depression of the 1930s, the rise of fascism and WWII will be talked about in apocalyptic terms in the foreseeable future.

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