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Phil Penrose - trade barriersThe unintended consequences of trade barriers.

“Obviously it’s not meant to be taken literally; it refers to any manufacturers of dairy products” – Monty Python, Life of Brian

As President Trump sets off trade clashes with countries across the world, traditional US business partners move towards retaliatory barriers to American goods. For US cheesemakers, the threat of losing competitive access to overseas markets means that for many of those in the towns and counties who voted for him, the downsides of this approach become more apparent than the upsides. Jeff Schwager, the president of a cheesemaking company in Wisconsin, told Ana Swanson of the New York Times: “If export markets get shut off, I could see us getting to the point where we’re dumping our milk in the fields.”

The cold reality of trade barriers has seen that the most American of brands, Harley Davidson, recently announced that they are planning to move some manufacturing out of America in response to Europe’s new tariffs on motorcycle imports. That could be severe blow to Harley workers in America – and a stark example of the damage that a trade dispute can cause. Despite this, President Trump accused Harley Davidson of ‘waving the white flag’ on the issue.

Chris Beauchamp at IG said: “It seems the US is hell-bent on falling out with everyone, increasing the risk that trade wars will do what all the other worries of the past nine years have failed to do – namely stop the great bull market in equities. The usual havens are in demand as investors seek refuge from the turmoil, with the ten-year Treasury yield dipping below 3% once more – investor concerns about what a 3% yield would do seem awfully quaint compared to the genuine concerns about the impact of trade wars.”

While markets have proved to be largely resilient to Mr Trump’s tactics this year, his recent bellicose statements towards China and Europe have raised the stakes. Pro-trade members of the President’s own Republican party have raised concerns about the potential economic consequences of the multiple fronts he has opened in his trade offensive.

“If export markets get shut off, I could see us getting to the point where we’re dumping our milk in the fields.”

Jeff Schwager, the president of a cheesemaking company in Wisconsin

Only time will tell if the President’s approach is a serious policy commitment or a sensationalist negotiation tactic – both are plausible. In the meantime, however, tensions escalate and markets are beginning to reflect concern – both technology and Asian stocks have experienced recent sell-offs in response to raised tensions.
With volatility comes opportunity. As multi-asset managers, we take great care in how we manage portfolio risk. Safe-haven investments such as the Yen, US Dollar and gold can serve a purpose in difficult times – though we’d consider traditional stalwarts long-dated govt bonds as outside this group right now. We’ll also use volatility strategies where appropriate to add further protection to portfolios where our investment management committee deem it necessary.

US cheesemakers will not be alone in feeling exposed to the unintended consequences of this trade war. How serious things get remains to be seen, and we remain vigilant.

Download Now: Weekly Comment – July 5 2018 – PP



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