Trade Issues Still Unresolved as Justin Trudeau Flies to Washington
Author: Greg Valliere
June 18, 2019
EXPECTATIONS ARE SO LOW ON TRADE that the only imminent surprises may be upside surprises. Canada hasn’t given up on ratification of the NAFTA replacement, and it’s possible that Presidents Trump and Xi may have a civil exchange at the G-20 summit in Japan later this month. The markets, expecting the worst, have set the bar low.
THE LATEST GLIMMER OF HOPE comes as Canadian Prime Minister Justin Trudeau, facing a difficult re-election fight in October, flies to Washington later this week to meet with Trump, Nancy Pelosi and Mitch McConnell. These hastily scheduled meetings, set for Thursday, come as the Canadian Parliament prepares to adjourn later this week; it can be called back into emergency session to consider the NAFTA replacement, called the USMCA.
PELOSI IS THE KEY: Republicans are largely on board with the new deal, but Pelosi is adamant that Democrats need to see changes in several provisions, including labor and environmental standards. Canada and Mexico will agree to re-open the deal, so the issue may come down to raw politics: Pelosi is locked in a bitter personal feud with Trump; would she want to give him any kind of victory?
OUR PREDICTION IS THAT TRUDEAU will leave Washington late this week with assurances that the deal is not dead — that Democrats will continue reviewing the pact as working groups devise alternatives. Odds of a final deal later this year have improved, perhaps to 55%.
THE ODDS AREN’T AS ENCOURAGING ON A CHINA DEAL, but expectations are so low that a simple handshake between Trump and Xi would be welcomed by the markets. We think there’s a chance the two presidents could agree to resume talks, but a deal is far from imminent; it would take months to agree on the half dozen issues that led to a breakdown of talks earlier this spring.
TRUMP RISKS OVER-PLAYING HIS HAND on China, since his shaky re-election prospects depend on a decent economy and a happy stock market. Neither is likely if the tariff war escalates. Continued trade anxiety will probably force the Fed to cut rates twice in the next six months, which would please Trump, but he needs a deal — and a good place to start would be an adult conversation with Xi in Japan.
STILL ANOTHER TRADE ISSUE LOOMS with Europe, as the EU and the U.S. face a tariff war stemming from Trump’s anger over European subsidies of everything from airplanes to wine. Logic would argue that Trump needs the EU to back him in his high-stakes dispute with Iran; U.S. allies won’t even believe photographic evidence that clearly shows that Iran attempted to sabotage oil tankers.
A TRUMP TARIFF WAR with the EU would isolate the U.S. from Europe for the rest of his presidency; hopefully he understands that and will back off on still another trade war. He’s a self-proclaimed “tariff man” who wants to bring whole industries back to the U.S., a goal his political base embraces, except there’s one huge flaw in the argument: there aren’t enough willing workers to fill the jobs that would come back to the U.S. — not, of course, unless there’s more immigration.
IT’S ONE THING TO FIGHT FOR FAIR TRADE, and we think Trump has a credible case against China. But it’s another thing to risk a 2020 recession because of tariff uncertainty, which is a growing concern in the markets. Trump is close to an inflection point on tariffs, and Justin Trudeau’s mood as he leaves Washington could be a tip-off on where the trade issue is headed.
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