Will Trade Skirmishes End the Economic Cycle?

Krishna Memani, Chief Investment Officer and Portfolio ManagerTariffs announced thus far are small and unlikely to have a significant impact on growth.As someone who grew up in an industrially insular India in the 70’s and 80’s, I know first-hand that protectionism is bad economic policy.I know tariffs won’t meaningfully reduce trade deficit. For that matter, I also know that, for a savings short country, eliminating or reducing the trade deficit may not be the best thing for near-term growth. Furthermore, it is easy to see how tariffs reduce productivity growth and act as an indirect tax. It is also quite obvious that other countries are likely to respond to the Trump trade provocation.President Trump was elected with a specific agenda and to protect his base he is moving forward on that agenda. So, I have accepted the fact that while it may be bad economic policy, some form of tariffs on some goods for some countries are likely to be passed. Related: U.S. Economy: This Girl is On Fire If you carry forward the political argument a bit further, it is also true that if the Trump Administration further intensifies the trade conflict, the real damage to the economy will be quite substantial. The same base that is cheering him on right now may not be so enthusiastic later when the consequences become clear. No one understands that more than Trump, in my judgment.Further, while limited tariff policies make us uncomfortable, the impact on the longer term growth potential of the economy is modest at best. Further, the policies could prove themselves over time to be bad and eventually get unwound.It will certainly create near-term issues with the markets. However, given the momentum in the global economy and the deficit financed stimulus to the US economy, my expectation would be that both growth markets will stabilize and likely move forward after a short hiatus, at worst.In the paper, Will Trade Skirmishes End the Economic Cycle , we show that these policies have nothing to do with economics. Instead it is all about politics.Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments. Carefully consider fund investment objectives, risks, charges, and expenses. Visit oppenheimerfunds.com or call your advisor for a prospectus with this and other fund information. Read it carefully before investing.OppenheimerFunds is not affiliated with Advisorpedia.©2018 OppenheimerFunds Distributor, Inc.Advertisement