Confidence Teeters as Trade Deals Stall

Insights and Market Perspectives

Author: Greg Valliere

September 24, 2019

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ALL TALK, NO ACTION: We’re beginning to doubt all the boasts about imminent trade agreements. The devil is in the details, and despite happy talk between President Trump and some foreign leaders, there are no final deals with Japan, the EU, the U.K., Canada, Mexico or — of course — China.

THE LATEST SNAG is with Japan, which reportedly is reluctant to sign a deal without assurances that the U.S. will not impose tariffs on Japanese cars and auto parts. Reuters reports this morning that officials from both countries had hoped to announce a final deal at this week’s United Nations meeting, but it’s possible that they will only announce an agreement in principle.

THIS SEEMS TO BE A PATTERN — an agreement in principle but no final deal on the mind-numbing provisions that comprise final trade treaties. The U.S-Mexico-Canada agreement, for example, has been agreed to in principle, but the U.S. Congress is determined to re-write major provisions before a likely ratification later this year.

THE GREATEST SOURCE OF TRADE UNCERTAINTY, of course, is between the U.S. and China. Trump charged last Friday that China is a “threat to the world” and asserted that there might not be a deal before the Nov. 3, 2020 U.S. elections. High-level talks will resume in two weeks, but a sweeping pact is not imminent; a piecemeal agreement is possible, but Trump doesn’t favor that option.

WILL CHINA WAIT? A question we hear frequently is whether the Chinese may wait until after the U.S. election, hoping for a much better deal if Trump loses. If Joe Biden wins the presidency, a quick agreement would be likely. But Elizabeth Warren is a China trade hawk, as are many Democrats. If Trump wins re-election, his terms would stiffen.

THE BOTTOM LINE is that the enormous trade uncertainty that plagues much of the world is likely to persist. China and the EU have more at stake, but the uncertainty has contributed to a severe recession in the U.S. farm belt and has raised prices of component parts for U.S. manufacturers, who cannot plan for future hiring and expansion until trade issues are resolved.

A GLOBAL RECESSION MAY BE AVOIDED if countries adopt aggressively stimulative monetary and fiscal policies, which seems to be the trend, but the inability to finalize trade deals is a major drag on confidence. There’s a pervasive lack of confidence globally and a huge factor is the uncertainty that will persist until trade deals evolve from vague promises to specific treaties.

WE INCREASINGLY BELIEVE that the key ingredient for global economies is confidence — faith by businesses, markets and consumers that economic policies will stimulate growth. But the risks now are downside risks, as political instability persists in the U.K., Western Europe, China and in the U.S., where impeachment proceedings may intensify the uncertainty.

THE U.S. WILL PROBABLY PLOD ALONG at a GDP pace a little below 2% — better than Europe but the U.S. is now growing below potential because of self-inflicted trade wars that still aren’t resolved.