03 January 2020

trade war

One of the more interesting phenomena of 2019 has been the continuation of the US-China trade war. I am not sure what US President Donald Trump was trying to achieve by ratcheting up tariffs on imports (predictably leading to reciprocal tariffs by China) but the whole episode appears to have defied the conventional logic of textbook economic theory. While stockmarket valuations are not a foolproof predictor of economic fortunes, the continuing (albeit gradual) rise of US stock indices over the period 2018-2019 suggests that the overall effects on the US economy have been either neutral or even positive.
   The US's 'experiment' with tariffs illustrates one of the problems with economic theories: they may only work under a fairly stringent set of conditions. If markets are already distorted in one way, predicting the effects of further distorting them in some other way may be difficult or impossible.
   It is not clear to what extent Mr Trump's objectives have been achieved, but it was a bold move to defy the orthodoxy and — so far at least — critics of his trade policy appear to have been proved wrong.