How Trump can appease financial markets on trade

(Bloomberg View) -- President Donald Trump followed up on his threats to restrict imports, reduce the U.S. trade deficit and save jobs by announcing that he plans hefty tariffs on imported steel and aluminum. The response in the markets was swift. Stocks tumbled and Treasuries rallied on concern that other nations will retaliate and set off a damaging trade war.

Is there a different path that could have positive implications for equity investors? As I suggested in a Bloomberg Prophets column in August, Trump has the option of pursuing a reduction in the trade deficit by increasing U.S. exports, shelving his administration’s focus on limiting imports. The severe market correction that could follow in a trade war makes this alternative approach an urgent one.

How Trump can appease financial markets on trade

The trade expansion process could be achieved in several steps. First, the signing of the higher tariffs on steel and aluminum, currently set for next week, should be postponed as trade negotiators attempt to persuade foreign governments to open their markets to increased U.S. exports. Market expansion by countries involved should generally be easier to achieve than limiting markets through tariffs and quotas.

Second, the 11 countries that expect to sign the new Trans-Pacific Partnership on March 8 would prefer to have the U.S. be a part of their accord, enabling them to meet the powerful competition from Chinese exporters. Even though the U.S. would have to agree to terms already in place if it wants to join the TPP, it could shift the focus to U.S. firms being able to compete for contracts in those countries on an equal footing with domestic companies -- a development that would boost earnings of U.S. multinationals, reduce the current-account deficit, and create U.S. jobs.

Third, an agreement ought to be concluded soon regarding an interim extension of the North American Free Trade Agreement, boosting competitiveness of the U.S., Canada and Mexico in their trade with the rest of the world. Following this, trade expansion within the confines of Nafta should be the objective in 2019 after elections conclude this year in Mexico and the U.S.

Absent those moves, investors can expect more of the same from what they saw on Thursday, when the Dow Jones Industrial Average fell by 420 points following Trump’s announcement, after having been up more than 150 points earlier in the day. It tumbled more than 300 points in early trading Friday. Investors are concerned that rather than helping boost employment as Trump hopes, a trade war would slow global growth and cause a loss of jobs in the U.S. and abroad as Europe, Asia and Latin America likely impose countervailing duties.

A trade war may be inevitable. In an early morning tweet Friday, Trump wrote that not only are trade wars good, they are easy to win. Recall that Trump withdrew the U.S. from the 12-country TPP in one of his earliest decisions after assuming the presidency. Even though Treasury Secretary Steven Mnuchin indicated on Feb. 27 that the U.S. would consider rejoining the group, the 11 remaining countries have reached an accord that will be signed March 8. If the U.S. wants in, it will have to agree to the same terms as the other members -- something that is unlikely to find favor in the Trump administration.

The perfect storm on the trade front may be completed by developments relating to the Nafta. A revised version of the 24-year-old accord had been expected by the end of 2017, but there is still no resolution in sight as negotiators from the U.S., Canada and Mexico pursue a seventh round of talks in Mexico City.

Canada’s chief Nafta negotiator, Steve Verheul, has criticized the U.S. for being inflexible, with positions driven from the top rather than with a give-and-take attitude. Canada has filed suit against the U.S. with the World Trade Organization alleging unfair use of tariffs to protect U.S. firms.

In Mexico, any major concession to help meet U.S. demands is likely to face criticism from Andrés Manuel López Obrador, the populist opposition candidate who is leading in the polls ahead of presidential elections on July 1. If Trump claims victory in Nafta negotiations, López Obrador’s ratings could get a boost and increase the probability that Mexico will seek to revise the agreement if he becomes president.

Trade has been a sleeper issue for global financial markets. No longer. Not handling trade carefully can end the equity rally that Trump sees as a sign of his policies’ success.

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.

To contact the author of this story: Komal Sri-Kumar at ksrikumar1@bloomberg.net.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

©2018 Bloomberg L.P.