Multiple Trade Battles Will Keep Markets Under Pressure

(Bloomberg Opinion) -- Global stocks rebounded the last three days on optimism that maybe cooler heads will prevail before the trade wars get out of hand. That optimism is likely to be short-lived. Investors should not only expect to be buffeted repeatedly by tit-for-tat measures by the U.S. and China, but by global trade disputes on two other major fronts.

Such pessimism on the part of investors is reflected in demand for the ultimate risk-off assets, U.S. Treasuries and German bunds. The yield on 10-year Treasury notes hit an intra-day low of 2.36% Thursday, about the lowest since December 2017.  Also substantiating investor preference for havens, the yield on 10-year German bunds fell this week to 0.136%, the lowest since September 2016.

Trade tensions are only likely to escalate given the support President Donald Trump has received from across the aisle in the Senate. Senate Minority Leader Chuck Schumer urged Trump in a recent tweet to “hang tough on China.” The view that China does not play fair on trade and investments is widespread among U.S. politicians and may lead to bipartisan support for the Trump measures. On Friday, China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat of higher tariffs, while the government said stimulus will be stepped up to buttress the domestic economy.

Then there’s the U.S. Mexico Canada Agreement (or USMCA, as the revised version of the North American Free Trade Agreement is known) that the leaders of the three countries signed in December but has not been approved by the U.S. Congress, where it faces significant opposition in the House of Representatives. Speaker Nancy Pelosi suggested last month that the proposed accord be reopened to institute new provisions to ensure that labor standards are enforced, especially in Mexico. And even though Bloomberg News reports that the U.S. is poised to lift steel and aluminum tariffs on Canada and Mexico in favor of stronger enforcement actions,  a move that helps clear the way for USMCA ratification, a final treaty may not be in place anytime soon as key U.S. politicians focus on the forthcoming elections.

Europe and Japan, as well, may soon be drawn into the tariff war. Although Trump on Friday announced a delay in imposing tariffs on imported vehicles from the European Union, Japan and other nations for 180 days to pursue negotiations, that only kicks the can down the road. Bloomberg News reports that  the problem is that Trump’s plan concludes that car imports constitute a national-security threat, and what’s he’s seeking in return for a tariff reprieve may not fly.

If tariffs are ultimately imposed, the EU has a list of U.S. goods on which it would retaliate with new levies, Cecilia Malmström, the EU’s Trade Commissioner, explained on Bloomberg Television. Even if Trump decides not to take on the EU and China at the same time and delays the deadline, German auto exports will eventually return to Trump’s crosshairs during the election campaign. Trump believes that auto imports are a major reason for the loss of jobs in the U.S. Midwest, which is part of the Trump base.

Senator Chuck Grassley, who is President pro tempore of the Senate representing the farming state of Iowa, suggested in an article in Politico that any trade accord with the EU has to incorporate provisions for increasing U.S. agricultural exports to Europe. This additional dimension – incorporating specific items that the EU needs to import, rather than just lower the U.S. trade deficit – will complicate the process and contribute to uncertainty for investors on whether a deal can be reached.

With fears increasing that the trade wars could slow consumer spending, delay investment expenditures, and push the U.S. economy into recession, Trump suggested that the Federal Reserve could offset the adverse impact by easing monetary policy, following the example set by the People’s Bank of China.

But can Fed action soften the fallout from higher tariffs? China’s experience suggests that while central bank measures have only moderated, not prevented, a deceleration in economic growth. In addition, stimulative measures have added to already dangerous levels of so-called shadow banking debt. Finally, China’s currency has weakened significantly, suggesting that monetary easing is encouraging capital outflows that could warrant further controls by authorities.

For investors, global trade will remain a major issue. Timely resolutions will provide a tailwind for risk assets, but that is unlikely based on various political and economic factors. It is more probable that there will be waves of threats and actions on tariffs that will boost the attractiveness of haven-like assets.

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Komal Sri-Kumar is the president and founder of Sri-Kumar Global Strategies, and the former chief global strategist of Trust Company of the West.

©2019 Bloomberg L.P.