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ALBERT EDWARDS: Far more catastrophic trade war threatening to break out
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Loading...ALBERT EDWARDS: US-China tensions are distracting from a far more catastrophic trade war threatening to break out
As President Donald Trump has continued to escalate a trade conflict with China, the Societe Generale strategist Albert Edwards argues that a far more damaging trade war may be brewing outside the spotlight.
Of particular concern to Edwards is the large discrepancy in global auto tariffs, which favors the European Union and China at the moment.
As President Donald Trump's trade conflict with China dominates headlines, a far more sinister situation is brewing — at least according to the outspoken Societe Generale strategist Albert Edwards.
His concern is focused largely on the European Union and the roles its accommodative monetary policy and weak currency have played in creating an unsustainable trade surplus.
Edwards points out that as the Federal Reserve has become more hawkish toward monetary tightening, the European Central Bank has been more dovish in its efforts to taper asset purchases. The resulting divergence has led to a weak euro and a strong dollar, which in turn has allowed the eurozone's trade surplus to grow because a depressed currency makes exports more attractive.
Edwards says a trade war is primed to break out as a result — and could dwarf the escalating trade conflict with China.
"The key is that the ECB has, with its divergent monetary policy, pushed down the euro and is indirectly responsible for greatly exacerbating current trade tensions," he wrote in a client note. "The ECB's QE might have papered over the cracks in the eurozone for now, but it has also raised the likelihood of a full blown US/EU trade war."
So how might a US-EU trade war look? Edwards says the focus will be squarely on European automakers. As he points out, Trump has long expressed disdain toward the dominance of German brands in the luxury auto market.
And today, the US charges just 2.5% on car imports, compared with 10% for the EU and 25% for China. Edwards says expect that to change as Trump looks to implement "considerably higher" tariffs.
Also complicating matters is the presence of Germany, which could be a far more difficult opponent than any Trump has faced so far in his global dealings. Edwards also notes the expedited nature in which the EU can process new regulations, leading to increased risk of immediate retaliation.
"Germany, in my years of observation, will not 'play the game' and make concessions, as well as conciliatory noises," he said. "It will push back robustly and the legalistic bent of the European Commission will see tit-for-tat tariffs being implemented far faster than anything seen in the current US-China trade spat."
Source: BI
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