The costs of irrationality – when protectionism shakes world markets

The introduction of far-reaching US tariffs has shaken the global financial markets. The US government’s turn towards protectionism calls basic economic policy principles into question and is likely to lead to a significant economic slowdown.

Any attempt to create prosperity through trade barriers contradicts everything our economic experience has taught us.

Not long ago, a scene in which a president announces the biggest trade restrictions in recent economic history and calls the day on which he proclaims them “Liberation Day” might have been good as a draft for a mediocre political satire. But this is now reality, and an expression of a political policy that questions the fundamental principles of world trade.

It has long been proven that blanket tariffs achieve little economic good, but have many negative effects. In a global economy based on the principle of the division of labour, they don’t lead to greater prosperity, but instead to higher prices and inefficiencies, and ultimately to less growth.

The impact on the financial markets was anything but liberating. Stock markets around the world came under enormous pressure, in some cases losing more than 10 percent within a few days. After an initial decline, interest rates on US government bonds also rose significantly again as doubts about the reliability of US economic policy grew. If nothing else, the US political leadership at least failed to remain unperturbed – following the intense market reaction and increased risks to financial stability, it suspended the country-specific additional tariffs for 90 days.

That said, there’s no sign of any quick return to the old order. The basic tariff of 10 percent remains in place and could lead to a renewed rise of up to 2 percent in inflation in the USA. Following a period of reciprocal escalation, tariffs on China – with some exceptions – now amount to 145 percent. This is tantamount to a trade embargo. But far beyond the tariffs, which are changing almost on a daily basis, what concerns us is the ongoing uncertainty.

Experience tells us that it’s precisely such uncertainty that leads companies to postpone investments – at a time when US consumers are under pressure from the threat of a renewed rise in inflation.  It means we can expect the US economy, which has already weakened recently, to slow down even further.

We’ll also feel the effects of the trade conflict in other economies, whether through lower demand as a result of tariffs or because the economic stakeholders in these economies are increasingly unsettled. Take Switzerland, where consumer confidence in future economic performance has declined sharply.

Nor are there any quick solutions in sight in the political sphere, the economy or on the financial markets. This means it’s all the more important to prepare for a more difficult period for investment. Our current positioning has proven successful in recent weeks. Our underweight position in US stocks and equities as a whole, along with our preference for Swiss real estate and the Japanese yen, have helped to cushion the setbacks. We’re maintaining this positioning. As long as the political and economic uncertainty continues to dominate, a cautious policy is not only sensible, it’s essential for stability and value preservation.

About Philipp Merkt

Philipp Merkt has worked at PostFinance since 2015  and is currently Chief Investment Officer and Head of Asset Management Solutions. Born in Solothurn, he studied IT and economics at the University of Fribourg and completed an MBA specializing in finance at the University of Bern and the Simon Business School at the University of Rochester in New York.

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