It's hard to be optimistic about the possibility of a US-China trade deal anytime soon. The issues are complex and strategically important to the success of both countries, and each side is reluctant to be seen as backing down in a negotiation. In order for a deal to begin to emerge, one side will likely have to capitulate in response to a serious economic downturn or a loss of political standing with a valued constituency. Neither of those dynamics is likely to happen anytime soon. If a deal were to emerge in the next four months, it is likely to be light on substance – perhaps new US agriculture sales to China, export restrictions on fentanyl from China, a bilateral panel to address specific cases of alleged intellectual theft, and the elimination of all tariff increases put in place since last year. A more substantive deal would have to be worked out over a much longer period of time and would presuppose more economic pain from higher tariffs on one or both countries. Nonetheless, the negotiating session between the two countries will resume in October, and the markets will continue to respond to every development – both positive and negative – along the way. We are also keeping an eye on the fluid situation in Hong Kong – any perceived over-reaction from either side could force the other to walk away from the trade talks.
USMCA is Huge.
Sometimes lost in the coverage of the ongoing US-China trade dispute is the status of the new trade agreement involving the US, Mexico and Canada (USMCA). President Trump has negotiated a new agreement with the two countries that serves as a replacement and update for the 25-year old North American Free Trade Agreement (NAFTA). The USMCA must be approved by Congress, and we expect the House to act first in November or December. We believe both the House and Senate will approve it, but any vote will be close and, of course, subject to many political considerations. House Speaker Nancy Pelosi (D-CA) controls the voting schedule in that chamber, and she doesn't have to bring the trade agreement up for a vote. It could be defeated through congressional inaction, and some Democratic strategists question whether they should allow a vote (and likely passage) of a bill that would reflect well on President Trump in a heated re-election cycle. Nonetheless, we think the Speaker will move forward with a vote late this year. A positive vote would be well received by financial markets, while a rejection would send a signal to the markets that the US trading system is again showing signs of dysfunction.
Since Trade Issues Are Moving the Markets.
US trade challenges exist beyond China, Mexico and Canada. The US will decide by mid-November whether to impose higher tariffs on imported automobiles and auto parts, which have a significant impact on key allies, including Japan and various EU countries (this is why Japan has prioritized a trade deal with the US recently. The US will likely extend its deadline and not impose the higher tariffs in November, but their mere threat is unsettling to many in those countries and industries. Trade tensions between the US and India also exist due to dueling higher tariffs imposed by each country on the other over the past year, with no favorable endgame in sight. All the talk about a US-United Kingdom trade agreement will be just that – talk – until BREXIT occurs, and this seems more like a 2020 project. On a more favorable note, the US and Japan seem to be on the verge of a limited trade deal, though there are some lingering issues that need to be resolved. As the election nears, President Trump will further express his angst over trade issues as the key impacted constituencies – agriculture and manufacturing – loom large in determining whether he will be re-elected.