UBS On-Air: Paul Donovan Daily Audio 'Competence matters'
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Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday, the 7th of April. Equity markets in Asia have collapsed with Hong Kong equities now down over 10%. What new information has there been over the weekend? For investors, the biggest concern may be policy competence from the United States.

Over the weekend, a series of administration officials gave contradictory views on the extraordinary trade tax increases, which does not suggest that a master plan exists. The administration's hostility to the penguins of Heard Island was explained as preventing the penguins from setting up a free trade port that would evade tariffs,

a comment that seemingly does not understand how global trade works and which underscores the absurdities within the original tariff formula. US President Trump took not one but two breaks from their weekend of golf to post on social media that the slump in equity markets was a deliberate strategy.

Investors may see parallels to Treasury Secretary Mellon's famous purged-the-rottenness-out-of-the-system quote in the wake of the 1929 equity market crash. Financial markets have long viewed Trump's trade taxes as a crude negotiating tool, which was essentially the position of Trump's first term.

There has been a shift, however, and tariffs seem to have become a good thing, all in capital letters, in the views of some in the administration. Nonetheless, the idea of competent policymakers accurately balancing risk and reward was seen as a check on the excesses of tariff policy. If markets question that competence, then they will question how much economic damage will be required to bring about a change in that policy.

The European Union is expected to announce its retaliatory tariffs today with a vote to implement them on Wednesday. The number being discussed in the media is $28 billion of taxes. This is a tax on US consumers and it is of course an economic negative. However, as this is a country-specific tax, it will be easier for EU consumers to substitute other countries' goods in exchange for the taxed US goods.

The US consumer does not have that option. This is an important difference from the 1930s. Then there was a destructive spiral as all countries imposed tariffs on a wide range of trading partners. That was a global trade war. This is a US trade war, with the US taxing imports from everyone else and the rest of the world, for now, trading in a normal manner with one another.

There are risks that China and the EU might get into a trade dispute, for instance, but the costs of doing so have risen as a result of US action and that should lessen the risk. There is also clearly a risk that financial markets become disorderly. Pricing in an increased probability of a US recession and a global slowdown is a logical response to what has happened. Pricing in ongoing policy errors from the United States may also be reasonable.

But if markets go beyond that, then, as with the UK's trust debacle, it will become necessary for some kind of intervention. Forced selling does not generate a fair market price, but a fair market price will need to reflect the damage to economies, particularly the US economy, arising from the current US policy position. That's all for today. Have a good day.

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