Chief Investment Strategist
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Does the US/EU deal raise hope for the end of the global trade war?
US President Donald Trump and European Commission President Jean Claude Juncker announced earlier this week that they agreed to begin negotiations for a zero-tariff-zone for non-auto industrial goods, free of subsidies, and any non-tariff barriers.
They agreed not to advance other tariffs during the process. This presumably removes the threat of new US autos tariffs, at least for the EU. They agreed to work toward undoing previously announced steel, aluminium and retaliatory tariffs announced earlier this year (again, for the EU and US).
Amid President Trump’s highly pessimistic statements about the state of trade relations between the US and EU in recent days, including naming the EU a “trade foe,” expectations for a breakthrough were extremely low. Trump appeared to “pre-announce” new autos tariffs aimed at the EU ahead of a national security study of autos trade (“Section 232” of US trade law.) However, the latest agreements appeared specific, credible, and positive. We would expect trade-sensitive European shares to rebound sharply (though not completely) on this news.
A first concern must be the surprise itself, with a positive outcome only the first in three months. Trade announcements from individual state actors are unpredictable. A trade framework agreement between the US and China was announced in early May by US negotiators. This was then torn up by President Trump within days. Such course changes in particular subject markets to costly volatility. Looking ahead, there are many pitfalls for negotiations between the US and EU ahead which could result in a breakdown.
However, we sense for several reasons that this announcement will prove more durable than the preliminary China accord:
This brings us to the two possible scenarios: some quick deals or this being just the beginning. Until now, the balance of evidence suggested a longer, entrenched trade conflict. Trump and Mexican President Elect Andres Manuel Lopez Obrador shared positive sentiment toward renegotiating NAFTA in letters exchanged in the past two days.
During the same period, Trump accused both the EU and China of exchange rate manipulation and discriminatory trade practices. He said the US was prepared to levy higher tariffs on $505 billion in Chinese imports. This would critically impact many other countries contributing to these products, including US firms.
Given the twists and turns of recent months, one cannot make definitive conclusions. However, we see the EU trade agreement as raising the probability of our ‘quick deals’ scenario. If the EU deal provides an example for others in how to strike a successful deal with Trump, it should raise the probability that offers are made. NAFTA negotiations may resume under the glow of a happy “Rose Garden” joint press conference at the White House for the EU and US Wednesday. “We both win,” President Trump noted.
“A narrower focused” trade war wouldn’t relieve all concerns. As noted, Trump may have been motivated to focus his attack on China and seek assistance with addressing particular grievances. Earlier, the EU and Japan appeared willing. Yet even in the case of China, a deal with the EU may be a beacon to see its way out of an unwanted dispute with the US.
Political guesswork has become elevated in setting asset prices. This is a somewhat less attractive risk environment, as a result. Even in the event of “quick deals,” US monetary policy is poised to extract an increasing toll on markets. Long-term US bond yields will also likely gravitate towards the top of this year’s trading range on a quick and favorable resolution to trade uncertainty.
Skepticism is deserved after provocative statements and false dawns in the trade war in recent months. Nevertheless, we must still judge the recent deal with Europe as raising the probability of positive outcomes for ending trade disputes, beyond just the EU. If its “new deals” instead of “new fronts” in the trade war, we would expect a positive turn for global markets.