EC Challenges For Investors In Q3

Seeing the world through such a prism brings into focus the economic rivalry between leading industrialized countries and large developing countries. 

The bilateral trade position becomes a critical metric in the relationship. Applying tariffs on allies like NATO members and Japan on national security grounds may not sit well, but the administration overlays this with a more aggressive stance toward China.The disapproval of Chinese trade practices is one of only a few issues with bipartisan support, and one that Congress urged even more forceful action on than the administration did (e.g., sanctions on ZTE).  

Owing to the asymmetries of the trade relationship, there are many more goods coming into the US from China upon which tariffs can be levied than the other way around. This means that China cannot sustain a tit-for-tat strategy; there are simply not enough imports from the US.All else being equal, this seems to encourage China to look for other channels to express its displeasure, namely areas where it recognizes that the US wants something from it, such as dealing with North Korea, reducing purchases of Iranian oil, and the territorial disputes in the South China Sea. 

The internationalist-wing among Trump’s advisers were unable to prevent the tariffs being applied to even Canada. However, they do appear to have won a concession on NAFTA: no withdrawal. Although reports have suggested that negotiations will resume over the summer, it may take some time before a new Mexican government will be in a position to resume negotiations. Part of the ability of Canada and Mexico to withstand intense US pressure is that they have begun coordinating their negotiations. If they are going to continue to resist things like a sunset clause, this relationship must survive Mexico’s election. 

Trade tensions will most likely intensify in the coming months. Tariffs and retaliatory tariffs will begin taking effect at the start of Q3. Secondary rounds are possible.Still, we recognize these as low rungs on the escalation ladder of a trade war because the percent of world trade being penalized is modest.The auto sector is a different matter.A formal investigation of US auto imports on national security grounds has been launched. The process can take the better part of the next year.Tariffs on autos would double the amount of trade captured.  

It is not clear how much damage has been done to the liberal world trading system that has evolved over the past half-century. US obstruction of re-staffing the judges retiring from the WTO panels may come to a head in September when reports indicate that there will not be enough judges to sit a single three-person panel. The groundswell of support for Democrats that bloomed like a flower in spring wilted by summer.

Projections of the Democrats taking control of both houses of Congress in November appears somewhat less likely. Trump’s base remains loyal. Several Republicans who have earned the President’s wrath are retiring, were defeated in primaries or have otherwise been neutralized, including former Republican presidential candidate Mitt Romney who predicted that Trump would be re-elected in 2020. The President’s support rose in the first half of the year and stood near 42% in an average of opinion polls, holding above 40% throughout Q2. No fresh Democratic narrative or personality has emerged to unify the party.

III

Trump has tapped into and articulated America’s ambivalence to free-trade: that it benefits some and hurts others.  In aggregate, it is regarded as a net positive.However, for various reasons, it has become increasingly difficult to move from paying the costs to reaping the benefits of free-trade.Technological and demographic changes are disruptive. The gradual erosion of what households experience as social protections and economists call labor market rigidities - known in the pejorative sense as welfare - may have undermined support for free trade, for which there was a national consensus in the prosperous post-WWII era.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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Moon Kil Woong 3 years ago Contributor's comment

Nice article and overview.

The focus on Q3 in the US will be the trade war. I believe the Fed will continue to try to pare down its QE but will be more accommodating on rate increases while the dollar holds up. If the dollar slides it will likely have to consider raising rates regardless. Sadly no one seems to be able to convince Trump that the trade war is bad for him even though even without countermeasures, it hurts the US auto industry and eventually an even broader swath of US manufacturing jobs along with US branding clout. Republicans should do something about this, but they are in a bind having elected a president with very liberal global economic stances.

Gary Anderson 3 years ago Contributor's comment

This article illustrates the complexity of world events as well as anything I have read. Still, to give up on free trade remains dangerous and hurtful to economies everywhere, including in the USA. First tariffs, then depression, then war. We can't play that game with nukes all over the place. It has to stop with the tariffs. Drastic tariffs must be put on hold.