General objectives that guide the activities and relationships of one state in its interactions with other states.

Source:belfercenter.org

Trade Policy: Geopolitics Back Firmly in Economic Focus

in Economy by

Financial markets ended higher at the end of last month as a series of strong economic data reports and softened trade rhetoric helped the Dow Jones Industrial Average break its previous losing streak.  Continued rifts in global trade policy have weighed on sentiment, which was negative heading into the July open as investors looked for further clarity on the possibility of new trade war activities initiated by the United States.

According to AskTraders.com, comments from the People’s Bank of China indicate possible changes in monetary policy measures and this can often add heavy selling pressure to Asian markets.  As a result of these events, the MSCI Asia Pacific Index has been dropping significantly and has shown some of its largest declines in nearly a month.  However, the New York session has consistently greeted markets with positive economic data, which recently came in the form of ISM Services PMI.  The most recent report did show a drop to 59.5 but its readings remain at historically elevated levels. These economic performances have helped fuel optimism aided by less aggressive trade comments from President Donald Trump.

Source:bloomberg.com

For the most part, these recent comments have suggested that renewed NAFTA agreements might enable Canada and Mexico to avoid the imposition of trade tariffs. Those comments alone helped the Dow Jones Industrial Average to close its accompanying session higher by 336.7 points (+1.4%), which allowed markets to finish with its best single-day performance in a month.  Similar gains were seen also seen in the S&P 500 (+1.1%), and the NASDAQ Composite (+1%), so the optimism these trade policy comments have generated has been widespread.  At the same time, the yield on 10-year Treasury closed higher by two basis points (at 2.88%).

However, during the following weekend, President Trump added fuel to the fire with biting tweets aimed at several different continents.  Economic textbooks will tell us that trade wars are bad, by definition. But with the deeply-rooted trade imbalances that have been in place for decades suggest that action will need to be taken at some stage. Many analysts have argued that you have to crack a few eggs to make an omelet and those casualties might be reflected in the long positions held by those with bullish exposure to equities as more of these trade details are clarified.

Previously, market economies were forced to contend with a 25% tariff on steel and a 10% tariff on aluminum imports. Trump explained that he would be willing to work with Canada and Mexico on tariffs if a more fair NAFTA agreement could be reached.  For economists, pricing-in the long term effects of an actual trade war will not be so easy.  However, we have seen some estimates for five industries that could be impacted most significantly by these long term developments:

Source:blog.interlogusa.com
  • Autos and Aerospace (potential cost increases of roughly $200 per car)
  • Canned Goods (AB InBev CEO has said industry jobs could be cut)
  • Technology (iPhone 10 price tag could be raised slightly on higher costs out of China)
  • Manufacturing and Agriculture (solar construction costs likely to rise)
  • Oil pipelines (costs could rise by an average of $76 million per pipeline)

Recently, the trade policy rhetoric was less aggressive but this is in stark contrast to what was seen over the last few months. Trump has lashed out at Europe specifically, saying that “we will simply apply a Tax on their Cars which freely pour into the U.S.” Peter Navarro (an advisor to Trump on trade issues) explained that further country exemptions will not be made, and this includes counties traditionally viewed as strong allies to the US.

Even with the softer tone in recent weeks, it is clear that Trump is not looking to take any prisoners here and we may have just uncovered what could prove to be the dominant market theme for the next few years.



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