LONDON - The problem with U.S. President Donald Trump using historical grievances to justify a trade war is that others will do likewise, leaving richly-valued U.S. tech firms and banks in the crosshairs of retaliation.

One of the big puzzles about last week's dramatic stock market plunge following the announcement of the sweeping U.S. tariff hikes was that so few investors seemed prepared for it when it was hiding in plain sight.

Trump's tariff plans, while at the high end of expectations, were flagged endlessly for months before and after his November 5 election victory. Resulting retaliation from China, Europe, Canada and others was publicly and repeatedly promised too.

That it took up to last Thursday for markets to begin to factor in a wider recession is bizarre at best, negligent at worst.

Even stranger was that being long U.S. megacap tech stocks was still considered the most crowded trade on the planet as recently as March. And yet by Friday, the once "Magnificent Seven" leaders of the sector were nursing a bear market 25%-plus decline from their post-election peaks in December.

It may simply be a case of the most crowded trades emptying out the quickest. But there are other reasons for Big Tech to turn tail.

THE REST IS HISTORY

Trump is justifying his decision to impose the highest average U.S. import tariffs in more than a century with a history lesson on how overseas trading partners have "looted, pillaged and raped" America and how often "the friend is worse than the foe."

Others have similarly dusted off the spreadsheets and history books, but they find a different narrative.

Trump's widely-criticized tariff formula focused solely on trade in goods, not services. But experts point out that this quid pro quo was precisely how the U.S. chose to design the globalized trading system that it's now choosing to unravel.

The global dominance of U.S. Big Tech companies, whose stock valuations have skyrocketed for more than a decade, was one of the big prizes Washington secured.

UNDER PRESSURE

In a recent article, trade economist Ricardo Hausmann questioned the administration's sole focus on goods trade, adding that tariff retaliation may be beside the point.

"America's economic ties to the rest of the world go far beyond goods. Services and investments are equally – if not more – important. And if that's where its advantages and potential vulnerabilities lie, there is little reason for other countries to retaliate with tariffs."

Counter-tariffs certainly might come - China already announced measures on Friday - but this is not where the pain would be felt most. The outsized slide in U.S. tech and bank stocks, as a result, reflects more than just recession fears.

Hausmann details how last year's $1.2 trillion U.S. goods trade deficit is only half the story, as there was nearly a $1 trillion U.S. surplus in services like digital, telecommunications and finance, if the repatriated profits of overseas subsidiaries are added back.

In effect, America's overall trade is nearly in balance.

But given that the value of U.S. investments abroad is estimated to be $16.4 trillion compared to the $374 billion that foreign companies earned in America last year, the former is a much more valuable target for any tit-for-tat reactions than U.S. goods, he said.

What's more, U.S. dominance in tech and intellectual property was not an accident. Indeed, it is rooted in the Uruguay Round of trade talks in 1994, when developing countries agreed to enforce rich countries' IP protections in exchange for goods market access.

If the U.S. is reneging on the latter, the former may be considered fair game.

"While the debate in the U.S. and abroad is focused on tariffs and their impact on prices and exports, other countries will soon begin to wonder whether protecting America's most valuable economic assets - its IP and the global mechanisms that allow it to be monetized - still serves their interests," Hausmann wrote.

Emerging economies aside, European leaders - with their multiple grievances against U.S. Big Tech and demands for fairer digital taxation - see this vulnerability too.

France, for one, said its companies should pause investments in the U.S. while the situation is clarified. French Finance Minister Eric Lombard also said Paris was working on "a package of responses that can go well beyond tariffs".

The European Union's recently adopted "Anti-Coercion Instrument" allows it to limit offending countries' access to public procurement tenders, restrict protection of IP rights or limit financial service firms' access to EU markets.

Too hefty to invoke?

"Donald Trump buckles under pressure, corrects his announcements under pressure, but the logical consequence is that he must also feel the pressure - and this pressure must now be exerted from Germany, from Europe," German Economy Minister Robert Habeck said on Thursday.

The gloves are off.

The opinions expressed here are those of the author, a columnist for Reuters

(By Mike Dolan; Editing by Paul Simao)


Reuters