Did No-One See It Coming? Lessons Of Brexit For The Trade War

Forbes

11-04-2025

SALISBURY, ENGLAND - OCTOBER 15: Britain's Queen Elizabeth II speaks with staff during a visit to ... More the Defence Science and Technology Laboratory (Dstl) at Porton Down science park on October 15, 2020 near Salisbury, England. The Queen and the Duke of Cambridge visited the Defence Science and Technology Laboratory (Dstl) where they were to view displays of weaponry and tactics used in counter intelligence, a demonstration of a Forensic Explosives Investigation and meet staff who were involved in the Salisbury Novichok incident. Her Majesty and His Royal Highness also formally opened the new Energetics Analysis Centre. (Photo by Ben Stansall -)
In November 2008, in the darkest hour of the global financial crisis, Queen Elizabeth II asked an audience at the London School of Economics 'Why did no one see it coming'. We might ask the same question today in respect of Donald Trump's tariff war, where he has diminished the things that he was reputed to hold dear – the economy, the stock market and the dollar.
One disturbing template that might offer insight into the path that the American economy takes is Brexit. As noted by the current prime minister of Canada, Brexit was not the solution to the problems that Britain faces. Certainly, the disengagement of the US from the world trade system is becoming as soap operatic and sometimes ludicrous as Brexit was.
An even more pertinent example might be Britain at the turn of the 19th century when there was a palpable sense that the might of its empire was peaking. At the time tariffs and trade were widely debated, and leading politicians like Joseph Chamberlain proposed the idea of an 'imperial preference', a lower tariff on trade with its colonies, to create a trading zone that would buffer the rise of the US and Germany.
To a certain extent, tariffs and trade became the issue of the day, but in the 1906 general election the public voted overwhelmingly for liberal, open trade (less restrictive tariffs) candidates. This I suspect was also the intention of those who supported Donald Trump in November last – keep the economy and markets strong, whilst evening up the status quo (a little). That tariff rates set by the US (and China) are at levels only last seen in the 1920's completes the shock, and rhymes with history.
One reason tariffs were a popular policy tool one hundred years ago is that the fiscal side of the economy was not well developed (only a small proportion of Americans paid tax) and, in some cases, central banks did not exist. Today, tax systems are well developed and as small, open economies show, they are the best mechanism to reduce inequality, and to entice investment, both stated objectives of the Treasury secretary.
This particular market crisis is interesting because it is nearly entirely man-made. Turkey has taken a similar path in recent years, all but eviscerating its bond market and currency, but these are inconsequential compared to the depth of US markets. Whilst the president has stepped nimbly and profitably (some say) away from the financial brink, he still risks contagion of his actions in a number of respects.
Two such risks loom on the horizon, an economic war with China and a crisis of credibility in US financial assets.
We are now led to believe that 'it was China all along', but it would have been easier to tackle China with the support of America's former allies in Canada, Japan, the UK and Europe.
For its part, China has plenty of tools to respond to the US with – it can allow its currency to weaken further and through supply chain disruption can inflict higher consumer prices, shortages of goods and lower (Chinese) demand on the US. Informal boycotts of American goods, investigations of US service firms and rare earth restrictions are just a few other tools at China's disposal.
Should an economic war between the US and China materialise, my sense is that a supportive response from the Federal Reserve has been made less likely by Wednesday's tariff capitulation by the White House, which demonstrates how arbitrary policy is under this administration.
In the longer-run, the actions of the Trump team could manifest themselves in a capital crisis in the context of the way they have undermined confidence in the US and by extension its financial system. What the likes of Peter Navarro seem not to have grasped is that the quid pro quo of America's trade deficit is its enormous financial power – the role of the dollar and Treasuries as lynchpins of the international financial system, the dominance of US financial systems and its integral role in the fabric of capital markets, and the capital that overseas investors provide them.
With Mr Trump behaving in the way that some might caricature as 'emerging market', If we apply an emerging market stock market valuation rating to US stocks, the SPX index would be half its current size for instance. Equally, the mid-week selloff in Treasuries which was most likely the result of hedge funds unwinding positions, but the poor performance of bonds underlines the sceptical view that markets are starting to take on the administration.
In this context, we may be at the beginning of a great unwind of American financial power.