Finally, Some Positive Trade News

Author: William Witherell, Ph.D., Post Date: May 21, 2019
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Toward the end of a week during which global markets were pummeled by a sudden worsening in the prospects for a trade agreement between China and the US, President Trump announced two positive developments in US trade relations with our allies.

Market Commentary - Cumberland Advisors - Global Trade

The first was a decision to defer for six months a scheduled imposition of tariffs on cars and car parts from the European Union (EU), Japan and South Korea. This was clearly a “punt,” not the resolution of a very difficult trade dispute. The second development does, however, represent the settlement of an important trade dispute. The US and Canada released a joint statement which announced that the 25% US tariff on steel imports from Canada and the 10% tariff on aluminum imports are being lifted. Canada also announced it will lift its retaliatory tariffs on steel and aluminum imports from the US. A similar agreement between the US and Mexico is expected shortly. The US also announced a reduction from 50% to 25% of the tariff it imposes on steel imports from Turkey, a separate move suggesting some improvement in the stormy bilateral relations between the two countries.

These steps to ease trade relations with our North American neighbors and with the EU, Japan and South Korea will enable the US trade negotiators to focus on China in the coming months. The agreement on steel and aluminum tariffs is particularly important. Both Canada and Mexico have been unwilling to proceed with ratification of the USMCA trade agreement signed in 2018 as long as these tariffs remained in place. The USMCA is meant to replace NAFTA. Both countries are now expected to proceed with ratification. This agreement should also improve the prospect for ratification by the US, although that is still not a sure thing. Certainly, ratification by the three nations would lead to expanded trade within North America, benefiting firms, workers, and farmers in the three countries. It should be noted that after China, Canada and Mexico are the US’s largest trading partners. While we have been critical of many aspects of Trump’s trade policy, negotiating and bringing into force the USMCA would have to be considered a significant success.

The worsening US-China trade war will remain at the forefront of investor concerns in the coming months. We will continue to report on developments in this dispute and discuss the implications for investors. We will also not neglect the postponed but not resolved trade disputes with the EU and Japan. The EU countries, which have a common trade policy, are together a more important trading partner of the US than is China, and Japan is the US’s fourth most important trading partner. Trump’s focus on auto exports from the EU and Japan, on the supposed basis that they are a national security threat, looks very tenuous to this writer and is insulting to our allies. That argument, which is used as a justification for the threatened imposition of tariffs, will probably not be an important factor in the give and take of the serious trade negotiations.

With respect to South Korea, President Trump indicated in his Friday statement that the US-South Korea bilateral trade agreement which was revised last year, included auto concessions  that “ could help to address the threatened impairment of national security.” South Korea officials accordingly are hopeful that their auto producers will not be subject to any eventual tariffs, but recognize the risk remains.

While China-US trade matters will dominate the headlines, US negotiations with the EU and Japan will also continue during the next six months, likely intensifying and becoming more public as the six-month deadline approaches. We expect these negotiations to be difficult, and they may become a source of market turbulence in the closing months of this year. No doubt they, along with developments in the US-China trade disputes, will be issues in the political campaigns aimed at the 2020 elections. Positive and timely settlement of the disputes with the EU and Japan, bringing to an end the uncertainty that is hindering business and investment decisions, would be highly beneficial to the US, EU, and Japan economies.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
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Sources: Financial Times, BBC.com, International Trade Administration, reuters.com

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