- There is no letting down in trade wars after the catastrophic G-7 Summit and the China tariffs.
- Markets are beginning to pay a bit more attention, but not panicking just yet.
- There are three critical dates for each geographic region to pencil in.
US President Donald Trump is picking fights on trade, and not only on trade, as he said that the German government is not acting according to the will of the people on immigration. As mentioned in the past, there are three open fronts: the North American one, the European one, and the Chinese one.
Uncertainty about the future already takes its toll as some orders and investment are postponed. At the moment, the impact is still limited, and the global economy is doing great. The time left until these dates allow for negotiation and reaching some agreements that would defuse the situation. After these dates, it would be much harder to undo the damage.
Markets reacted so far in a recurring pattern: selling off on the dips but bouncing back quite quickly. The “buy the dip” mentality is hard to get rid of. What do markets know? They may think that Trump is making bombastic claims and moves, going to the edge only to come back.
The hardline decisions are egged on by the Trump-supportive media and come ahead of the US Mid-Term elections in November which may see Democrats retake the House. Trump may be trying to fulfill campaign promises and shore up his base, driving them to vote. Nevertheless, some adverse developments cannot be easily undone even if they are only there as political stunts.
Here are updates on these three fronts and the relevant dates to watch on each one.
1) Europe – watch the long weekend beginning on June 28th
European leaders meet for a Summit on June 28th and June 29th. Brexit was supposed to be the primary topic, but the EU may do what it always does: kick the can down the road to the October Summit.
Yet with trade, they are set to move forward with retaliation against US tariffs on steel and aluminum that will come into effect on July 1st. So far, Europe has shown a united front against Trump’s protectionism and vowed to maintain the post-war multilateral order. They are likely to announce the exact details of the counter tariffs.
Yet not everything in the old continent is hunky dory. Countries are set against each other on the rule of law (the Visegrád Group), immigration (Italy vs. Spain, Germany vs. Germany), and Russia, with the new Italian government willing to improve relations with the big neighbor to the east.
If Italy or any other country steps out of line and opposes imposing counter-duties on the US, it could provide relief. Such an ease may be temporary but opens the door to improvement.
If not, the EU will move forward with tariffs and the US is set to make its own retaliation. The Administration is already looking into slapping tariffs on European cars and car parts. As mentioned earlier, these moves can be undone, but it is easier to refrain from imposing duties than to remove them.
2) North America – July 1st
In the failed G-7 Summit, Trump clashed with Justin Trudeau, the Canadian Prime Minister. The latter said he would not be pushed around and the US President angrily pulled off from signing the communique. the North American Free Trade Agreement talks were close to a conclusion, but the US insisted on a sunset clause: renegotiating the deal.
Earlier, the US imposed a 25% on steel and a 10% aluminum on Canada and Mexico, invoking Article 232 which refers to national security. The use of the security excuse offended Canada and dealt a blow to the negotiations. The suggestion that the US could strike bilateral deals with each of its neighbors was rejected by both sides.
While negotiations are going nowhere fast, the US tariffs and steel and aluminum and Mexico’s counter-tariffs already cause uncertainty and postpone orders. US fruit exports to Mexico and Canadian metals are in limbo.
However, Mexicans go to the polls on July 1st to elect a new President. The outgoing business-friendly administration of Enrique Peña Nieto continues talking with the US at this late stage of the campaign and may want to reach some kind of an agreement. Opinion polls suggest that Mexico’s new leader will be Andrés Manuel López Obrador, or AMLO, a hard-left populist. AMLO said he would respect any deal, but if no agreement is achieved, he will go his own way.
Therefore, the outgoing Mexican Administration has a short period to reach an agreement that would somewhat ease tensions and corner Canada. Yet if they stick to the trilateral NAFTA arrangement, and AMLO is elected President, the chances of successful deal continue falling.
July 1st is also Canada’s Independence Day. Standing up for Canadians, as Trudeau stressed, may have a greater emphasis on this day.
3) China – July 6th
The most recent development is the American decision to tackle Chinese tech with tariffs worth $50 billion. China’s response was swift and it announced countermeasures. Yet also here, the decision has not come into force just yet.
The world’s No. 1 and No. 2 economies have been in talks for quite some time. Back in May, US Treasury Secretary Steven Mnuchin told the press that trade wars had been put on hold. His soothing words were shattered by Trump which back-pedaled and took a harder stance. Nevertheless, China’s offer to buy more American goods could resurface and kickstart fresh negotiations.
If not, the US tariffs will come into effect on July 6th, and China’s counter move is due on the same day. A significant blow to trade between the two superpowers could cause a broader adverse effect on markets.
Conclusion
The global economy is still humming along quite nicely, but fears of a full-blown trade war are already causing some damage. We see some trade skirmishes or border clashes but no full-blown trade war quite yet. After the three dates mentioned here come and go with new tariffs, stocks could crash, and the safe-haven yen could soar while commodity currencies may plunge.
Will it happen? We will know soon enough.
More:
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- Trump tariff plan explained: What are trade wars and how do they affect currencies
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