NAFTA outburst signals US-China trade dispute set to escalate

Trump revealed in off-the-record comments to Bloomberg, reported by the Toronto Star, his ‘winner takes all’ approach to negotiations. He said of the NAFTA trade talks, “that any trade deal with Canada would be “totally on our terms.”” – Win-win is clearly not a concept Trump recognises.

In recent days the US has also made accusations of Chinese hacking and espionage. The timing appears aimed at readying the US public for an escalation in the dispute over trade with China.

These two together point to an alarming deterioration in the dispute in the coming weeks. Bearing in mind these are the world’s two largest economies, there will inevitably be collateral damage to the global economy.

More tariffs on the way

The US started with 25 percent tariffs on $34 billion of Chinese imports, followed by tariffs on another $16 billion . Widening tariffs to a further $200 billion of goods are under consultation. These cover products ranging from food, chemicals, furniture through to machinery.

Collateral damage

The threat of an escalation of trade wars are for now having the greatest impact on emerging markets, adding to the problems of falling commodity prices and investment.

The IMF in its July World Economic Outlook update warned:

“Among emerging market and developing economies, growth prospects are also becoming more uneven, amid rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals.”

More advanced economies are also starting to feel the impact. For example, the Australian dollar dropped against the US dollar on news that the US and Canada failed to reach agreement over NAFTA.

AUDUSD NAFTA talks stall
Australian dollar falls on news of NAFTA talks stalling

In the same update the IMF highlighted the danger for advanced economies:

“The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects…”

Hope for ‘common sense’ to prevail

Many organisations and analysis view the US’ protectionist approach to trade as an act of self harm, they hope that ‘common sense’ will prevail. They argue that pressure from businesses and consumer groups will persuade the administration to come to a sensible accommodation with China. This view is reflected in the positive reaction of markets whenever a US official sounds a conciliatory note.

But the direction of travel shows that the the dispute is much more profound than simply trade deficits. It’s quite clear there is a strategic fear of China among a section of US policy makers.

This dispute between the US and China will ebb and flow, raise hopes and dash them, but markets are in for more of the same volatile ride…

Gary Hollands – September 2nd 2018

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