Having upset the current trade regime, the U.S. administration may be in no particular hurry to find a new status quo. We would treat the recent U.S./Europe deal with some caution and expect continued trade (and therefore market) disequilibrium.
1. The U.S./EU trade deal has high aims and also puts threatened tariffs on hold. But points of contention remain.
One danger of upsetting an existing equilibrium is that you are never sure what the next equilibrium point will be. Recent trade developments illustrate this very well. Wednesday’s meeting between President Trump and European Commission President Juncker appeared to turn out better than many had expected. The two sides announced that they would work together in an attempt to eliminate tariffs and other trade barriers on industrial goods (excluding the contentious auto sector). They would also put on hold any threatened new tariffs (including those on autos imports) while negotiations continued, and would strive to reform the WTO. Reaction to the deal was generally positive, with the German economy minister, Peter Altmaier describing it as a “breakthrough”. His French opposite number, Bruno Le Maire, was more circumspect, saying that he needed clarification, and warning that agriculture should be excluded from the discussion. Food and environmental standards may be a future point of contention, as could be U.S. public sector procurement policies.
2. It may suit the U.S. administration to take a softer line on Europe for now, but pressure on China will continue.
The outcome of these U.S./EU talks led to a modest equities rally. But we think it would be wise to stay cautious. For the moment, it may suit the U.S. administration to take a more conciliatory approach to Europe: there is some evidence that some U.S. politicians and voters are increasingly getting cold feet over tariffs and trade protectionism. Certainly, the reaction to President Trump’s new USD12bn plan to compensate farmers impacted by regulatory tariffs has been largely negative. President Trump may therefore want to demonstrate a “win” in the run-up to the U.S. mid-term elections. But he will also want to keep the pressure on China, which is his real focus, and NAFTA reform is still up in the air. So expect more trade-related volatility ahead: we are still a long way away from a new world trade order.
3. The U.S. could feel less pressure to find a solution than its trading partners, given its strong economy.
Today’s strong U.S. Q2 GDP figures, and likelihood of upbeat U.S. consumer confidence, ISM manufacturing, motor vehicle sales and employment data next week also suggests that the U.S. will continue to feel little pain from this tariff dispute. Strong growth in U.S. Q2 earnings also suggests resilience. So while the U.S.’s trading partners will want a quick resolution to existing disputes, the U.S. could (perhaps wrongly) be much less concerned by the prospect of continued disequilibrium.
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