The biggest current threat to global growth is a trade war. There are other risks, too. The U.S. Federal reserve is unwinding quantitative easing and raising rates, but is making the policy shifts very gradually, with careful market guidance. Governments are focused on whether they need to cut taxes, not raise them; so, no growth risks from fiscal policy. Consumer confidence is relatively high around the world, from mature industrial countries to young emerging-market nations. Equity market valuation might appear high to some, but stock market corrections do not cause recessions unless there is a financial panic – and systematic risks from financial institutions are much lower than when the last crisis occurred in 2008. After considering the other risks, we stand by our analysis that if the current synchronized global economic expansion is derailed, the most likely cause will be a trade war. YET, we are optimistic. So far, the actions taken earn only the terminology of “Skirmishes,” but if they escalate to “Battles” and then a “Trade War,” we will need to re-assess the risks. Here is our review of the issues and challenges.
The trade skirmishes began in earnest in March 2018 with the U.S. imposing tariffs on steel and aluminum in the name of national security. The U.S. temporarily exempted Mexico and Canada pending progress on the NAFTA negotiation, and then eventually agreed to exempt Europe. The European Union had threatened to retaliate with highly focused tariffs, from jeans to bourbon to motorcycles, designed to hit some hot-button pain points involving name-brand companies. Later in March, the U.S. leveled tariffs on China, aimed at intellectual property.
In progress in the spring of 2018 are the U.S.-Canada-Mexico negotiations over the North American Free Trade Agreement (NAFTA). While technical committees involved in the negotiations reportedly have made some progress on the small issues, the big issues that separate the U.S. from Canada and Mexico revolving around domestic-content rules (think autos) and how to handle disputes (the U.S. wants a system more to its liking), are far from being resolved. Indeed, while the U.S. rhetoric about unfair trade practices is often aimed at China, the steel and aluminum tariffs can also be seen as bargaining chips in the NAFTA negotiations. Our take-away is that the U.S. is only a very short step away from announcing its intention to withdraw from NAFTA. We note that announcing the intention to withdraw triggers a six-month waiting period. At the end of the six months is when the final decision to withdraw or not would be made.