Keeping track of the state of U.S. trade has been a full-time job for investors. Both proposed and implemented tariffs, as well as tentative agreements have all been changing week by week. In this week’s post we aim to summarize where we are with respect to trade and provide a counter point to the concern around the trade developments.
The significant positive development this week (marked in green under the Canadian flag in Figure 1) was Canada joining in on a post-NAFTA agreement, dubbed the United States-Mexico-Canada (USMCA) agreement. Markets breathed a sigh of relief following the trilateral trade deal with U.S. stocks rising after the announcement. The USMCA has been agreed to in principle by all three countries, but will need to go through each countries respective legislative processes. While U.S. midterm elections in November and Canadian Federal elections next year provides some political risk, our base case is the agreement gets signed by all parties.
Meanwhile, the White House has put a hold tariffs on autos from Europe as negotiations continue, a sign we take as positive. Still, the biggest issue investors must grapple with is tensions with China. As of right now, there is planned increase to the tariff rate on $200 billion of Chinese imports from 10% to 25% in January 2019. Moreover, China has declined meeting with U.S. officials until after the U.S. midterms, suggesting negotiations may draw out longer than anticipated.
While the nitty-gritty of trade is important for investors it is always useful to keep in mind – 1) what is happening with economic fundamentals? And 2) does this noise fundamentally impact the business landscape?
With respect to the first question, U.S growth is still strong and there is no sign that trade tensions are causing a drag on economic growth or surge in consumer prices. While the second question is a bit more nebulous, as of now, companies are operating business as usual and not changing their capital expenditure plans1.
Overall, while trade tensions do require watching, they are not currently an impetus to get out of the market, but rather, a reason to be more thoughtful in how portfolios are allocated across global markets.
Trade tensions summary
Key Green= Improved, Yellow= Unimproved, Red= Worsened
1 “Are Tariff Worries Cutting into Business Investment?” David Altig, Nick Bloom, Steven Davis, Brent Meyer, Nick Parker. August 2018.
Source: Department of Commerce, J.P. Morgan Asset Management. Data are as of October 2, 2018.