Trade War Time-Bomb: 4 Key Events Could Signal Escalation
Ashraf Laidi | Mar 18, 2018 01:15AM ET
This coming week will be dominated by the Federal Reserve interest rate announcement and the highly scrutinized dot plot forecasts. But it’s clear that the overriding focus in financial markets remains tension surrounding tariffs and uncertainty about bilateral and multi-lateral agreements.
The US has fired its opening shots in the global trade war and several fronts are emerging, with pitched battles set to begin in the weeks ahead. Here are the things to watch:
h3 1) Steel/Aluminium Response/h3Circle the date: Friday, March 23. That’s when the 25% steel and 10% aluminum tariffs are scheduled to be implemented on most of the world. The US has opened the door to exemptions but so far only Canada and Mexico have been spared. Many countries are angling for a waiver, but others are preparing to retaliate. If and when they do, the market will be watching how aggressive they are, followed by how the US responds. The fear is that it quickly escalates.
h3 2) The NAFTA Clock/h3A recording from Trump at a fundraiser was released Thursday, once again, exposing his thoughts about leaving NAFTA in order to negotiate a better deal. That time may be drawing nearer. Just 6 of 30 chapters in the agreement have been closed with some big snags remaining. In the month ahead, the focus will be on autos but that’s likely to be challenging. The problem is that elections are coming. The main one is the Presidential election in Mexico on July 1. That is likely to mean a new negotiating team for Mexico. Combine that with two major provincial elections in the summer and the US midterms on November 6 and the time for Trump to agree, quit NAFTA or put talks on hold is likely less than a month away.
h3 3) China Tariffs/h3The US is undoubtedly targeting China and its massive trade surplus with the US. The steel tariffs are minor compared to what’s coming. Trump has asked for $60-$100 billion in tariffs against China, later confirmed by White House advisor Navarro that they would be delivered in the ‘coming weeks’. China could likely stomach the steel tariffs, but this second set of import duties will merit a response. Of all the upcoming events, this is the one most-likely to spiral and hurt markets.
h3 4) WTO Talk/h3The arbiter of global trade rules is the World Trade Organization. It sets the rules on tariffs and can sanction countervailing duties. One reason the US is struggling to renegotiate NAFTA is that Mexico is prepared to fall back on WTO rules, which would limit tariffs to 2.5%. Comparatively, that’s easy for Mexico to swallow and made even easier by the likely decline in the Mexican peso on the announcement of any NAFTA pull-out. So long as the WTO is intact, a trade war probably can’t spiral out of control but US officials are increasing criticism of the body. If Trump begins to direct his ire at the WTO, watch out.
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