One step closer to an all-out trade war may have happened when the US Treasury named 5 countries to its new “Monitoring List” on Friday. China, Japan, Taiwan, South Korea and Germany were added based primarily on the large trade deficits but were not labeled “currency manipulators”. The monitoring list does not bring about any sanctions but it does put the countries on notice that some of their practices are unacceptable by the US government.
The timing is very interesting as one of the main themes of the upcoming US elections looks to be trade agreements and unfair trade practices. For months now Donald Trump has been preaching on how these countries have been taking advantage the US and how the trade agreements that are in place have been poorly negotiated. Trump has named China and Mexico as being major offenders and promising changes like adding taxes and tariffs on any goods produced in these offending countries.
It is not just the Republican side that has taken this populist position. Bernie Sanders has been highly critical of his Democratic opponent Hillary Clinton for her support of NAFTA and other trade agreements. While Sanders may not win the nomination he has successfully moved the Democratic party in a more progressive and protectionist direction.
The message of unfair trade has resonated with the American public and with politicians like Sanders and Trump ready to place the blame on the US’s largest trading partners. If Chinese goods will soon see a 35% tariff added it is highly likely they will retaliate in kind.
A great deal of focus will now be on the currency markets of these countries and their respective government’s actions. Should any of these countries be elevated to a sanctions list then it a trade war becomes a real possibility.