By Greg Valliere
Horizon’s Chief Global Strategist

May 14, 2018
Will Donald Trump Go Soft on Trade?

GEOPOLITICS THIS WEEK: Prepare for saturation coverage of the U.S. embassy in Jerusalem, European anger at U.S. sanctions over Iran, a radical new shift in Iraq, a new populist government in Italy, etc. For the financial markets, the focus will be on the biggest geopolitical wild card: trade disputes, as NAFTA and U.S.-China relations hit an an inflection point.

THE THURSDAY NAFTA DEADLINE: GOP Congressional leaders have proclaimed that they need to see a NAFTA deal by May 17, in order for a treaty to win approval in this Congress by year-end. They fear the next House will be controlled by the Democrats, and they’ll need at least six months for hearings, vetting and tweaking of the massive pact. Just one problem: a NAFTA deal isn’t finished yet.

NEGOTIATORS ARE AIMING FOR AN “AGREEMENT IN PRINCIPLE” by Thursday which would leave the details on several key provisions – dispute resolution, auto content rules etc. – still unresolved. And there’s another complication: July 1 elections in Mexico, as that country potentially veers toward a more populist government.

THE GREAT WILD CARD is Donald Trump, of course. He loves a good reality show: what suspense – NAFTA is in trouble…no, the deal is alive !! We suspect there will be an agreement in principle in the next week or two, probably missing the May 17 deadline, which means Congress will have to get its work finished in a shorter time frame. Trump is close to a deal – he’s all about getting deals – and then he will move on to micro-manage trade issues with China.

DISARRAY IN THE WHITE HOUSE: Larry Kudlow and Steve Mnuchin are winning some points against the protectionists, but the only player who counts is Trump – who apparently has decided to act on his own, proposing a stunning deal with Chinese telecom giant ZTE, perhaps in exchange for Chinese relief on U.S. agricultural exports. Republicans fear electoral losses this November in the Farm Belt without some concessions on soybeans, hogs, etc.

THE BIG THREE: Here’s our quick take on the three major trade disputes:

1. NAFTA: A 60% chance of an agreement in principle by the end of May, with many details still to be ironed out. Chances that Congress will approve the deal by year-end: no better than 50-50.

2. U.S-China: A decent chance, maybe 70%, of some deals soon (but not a comprehensive pact). Trump’s astonishing reversal on ZTE (he wants to protect Chinese jobs, he tweeted) sent a signal to Beijing, and we expect progress when a high-level Chinese delegation visits Washington next week.

3. U.S. sanctions against European companies that trade with Iran are likely to persist, as relations with traditional U.S. allies – France, Germany and the UK – continue to deteriorate. This is the most troublesome of the three trade disputes.

BOTTOM LINE: U.S. businesses have pocketed huge tax cuts, but suddenly many of them are confused by literally hundreds of pending new tariffs on imported goods that they rely upon. This uncertainty is the only major dark cloud in an otherwise strong U.S. economic outlook – and we believe Trump and his advisers would not jeopardize the impact of business tax cuts with confusing new trade disputes.

THE U.S. WILL SEND SIGNALS that trade wars are unlikely; Trump wants deals – he loves victories, not defeats. So there will be suspense over trade deadlines and specific provisions – this all fits with the reality show concept. For the markets this could become an irritant because the details are so complicated. But a crisis? Unlikely.