The Markets Are Getting Ahead of Themselves on Trade Deals
Author: Greg Valliere
February 20, 2019
THERE’S A MARKET CONSENSUS that trade disputes will subside ahead of the U.S. elections, which — logically — makes sense. But logic is in short supply in this hyper-partisan city, and while we’re cautiously optimistic on trade deals, we think the markets are getting way ahead of themselves on three fronts.
FIRST AND MOST IMPORTANTLY, there’s no chance a U.S.-China deal can be finished by the March 1 deadline, even though negotiators from both countries are feverishly wading though issues this week in Washington. The markets almost unanimously expect the deadline will be extended for weeks or months, which seems probable.
BUT LET’S NOT OVERLOOK why the deadline will have to be extended: there’s no agreement yet on huge issues — the dominance of Chinese state-owned monopolies; China’s theft of technology and intellectual property; and how a trade deal would be enforced. Resolving these and other issues will take a lot of time.
COMPLICATING THESE TALKS are the maddeningly inconsistent statements from Donald Trump and his advisers, who sound hawkish on one day then conciliatory the next. The president will keep everyone guessing for the next few months; he loves the drama, so there will be highs and lows before he meets with Chinese President Xi — and until that meeting is scheduled, there will be no deal. Trump wants a reality show blockbuster; a deal will not be announced by mere negotiators.
WE THINK THERE’S A 65 PERCENT CHANCE of a U.S.-China trade agreement in principle in a few months; Trump will proclaim it as a historic victory but it will take months more to iron out all of the details. Yet many investors view this as a done deal — and while it’s likely, it’s far from a sure bet.
THEN THERE’S AUTO TARIFFS: Trump received a secret Commerce Department report this weekend on autos, which may have concluded there are barriers to U.S. sales in Europe, Japan and elsewhere. He’s still considering 25% tariffs — a prospect that prompted a scathing rebuke from Angela Merkel this past weekend; she noted that most BMWs sold in the U.S. are manufactured in South Carolina.
KNOWING HOW TRUMP NEGOTIATES, we would not be surprised to see him impose auto tariffs simply to send a message to the Chinese that he’s capable of playing very tough. We think there’s at least a 50% chance that Trump will impose auto tariffs in the next few weeks, which would prompt retaliation.
FINALLY, THERE’S THE NAFTA REPLACEMENT: We joke that the main difference between NAFTA and the new deal is the acronym. But there are provisions in the new USMCA that have encountered fierce opposition in the House, were Nancy Pelosi is in no rush to ratify a deal that’s opposed by organized labor and environmentalists. Chances are below 50% that the deal will win ratification any time soon; U.S. steel and aluminum tariffs will complicate the debate.
BOTTOM LINE: We don’t expect the eruption of an all-out trade war anytime soon, but the market view that trade will subside as an irritant is way too sanguine. Trade uncertainty will persist for the next few months.
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