President Trump first started to threaten China, Germany and other surplus countries with tariffs and new barriers to trade, the markets had the occasional shiver – but marched on upwards.
The tax cuts and growth rate sustained progress. Many in markets assumed that the international trade system was robust enough to survive a few tariff blows from an unorthodox President, which meant the adverse trade narrative did not force a bear market.
It was true that the trade row with China was quite bruising. Some commentators started to talk about the end of globalism, whilst the more realistic foresaw more economic nationalism emerging in certain sectors like communications and technology related to defence. The theme was worth a mention but was a second-order issue that was unlikely to drag whole markets down, just an irritant that would slow growth a bit and affect individual sectors and large companies.
The pandemic accelerated the process
The arrival of the pandemic and the extraordinary reactions of governments, both shutting down large areas of their economies and injecting unprecedented amounts of new cash and stimulus to offset the worst effects, overthrew all the prevailing investment conversations of early 2020. Something so much bigger was going to dominate the valuations of bonds and shares. Most analysts became fixated by the deeds of the central banks, who determined to fuel a bull market to get out of the market meltdown of late March 2020. Attention also shifted to the stimulus packages from governments.
The pandemic response greatly disrupted and distorted international trade. In the early days the disruption was greatest, with many factories and retail outlets closed down. Commodity prices and volumes traded around the world fell sharply. Trade in many things from cars to office equipment plunged. Trade in food and basics for life at home increased, requiring repackaging and reorienting as demand from hotels and restaurants disappeared.
We have been in a patchy global recovery phase since the summer of 2020. Meanwhile new things have come to disrupt world trade. In May of 2021 a large container ship lodged in the bank of the Suez Canal at a narrow point, blocking all traffic and leading to chaos in international shipping movements.
Several large Chinese container ports have this summer had to temporarily close some parts of their facilities as their government demands lock down to deal with localised Covid-19 outbreaks. There has been a long running shortage of containers in China and the rest of exporting Asia, as the West has failed to send back empty ones in a timely way and is using some of them for storage, reducing the flexibility of the shipping system. The shortage of certain products like semiconductors has cut the volumes of products that incorporate them.
As a result, shipping container charges have gone through the roof. A Shanghai to Rotterdam 40-foot container this week cost much more than a year ago. The leading shipping lines are scouring the world to see if they pick up more containers and if they can increase their general shipping capacity.
As they do their long-term forecasts, they need to factor in two other considerations. Growing nationalism in policy by the US, the EU, China, India and other large players is pushing more large companies to establish local production and to cease to rely on so many global supply chains. This is intensified by the increased trade tension between China and the US over intellectual property. They also need to consider how much longer the central banks, led by the Fed, can go on boosting money growth by creating new currency. As we approach the end of 2021 more quantitative easing programmes will be slimmed or ended.
This week the Fed continued its leisurely conversations about whether and when to taper and concluded that it was still too early. Markets assume a taper by the year end and can live with that. Meanwhile, the seizure of Afghanistan by the Taliban has just unleashed more disruptive forces into global trade routes and the alliances sustaining them.
China, Iran and Pakistan may be the winners, but there will be no winners if the Taliban revert to their old ways of harbouring and training terrorists who wish to subvert a wide range of states and established governments. They may not all take kindly to China’s treatment of Muslims at home or Pakistan’s twin track approach of being a friend of the West as well as of the Taliban.
Growing nationalism and some continued disruption to trade is part of a more worrying background for investment after such a good run based primarily on the massive creation of new US dollars and the concerted efforts of the main central banks and governments to support markets.
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