As the world gets together in Russia to celebrate sport and sportsmanship at the 2018 FIFA World Cup, it’s a stark contrast to see the U.S. at odds with most of the developed world as far as trade is concerned.
Things didn’t improve at the latest G7 summit in Charlevoix, Quebec. Indeed, Trump’s actions – calling Prime Minister Justin Trudeau “meek,” “dishonest” and “weak” for protesting U.S. tariffs on aluminum and steel – following his early departure from the meeting, have many wondering what impact increasingly restrictive trade will have on the global economy, on major trading nations and on multi-national company earnings.
Trade at the top of President Trump’s agenda
Since his election in 2016, President Trump has put international trade at the forefront of U.S. foreign policy. He successfully campaigned using nationalist rhetoric, and now continues to follow through with his protectionist agenda, sparking concerns that escalation could result in a sharp slowdown in global economic activity.
Steel and aluminum tariffs are only the latest in a string of policy announcements.
- January 2017 – the U.S. withdrew support for the Trans-Pacific Partnership (TPP).
- July 2017 – the Trump administration outlined its objectives for renegotiating the North American Free Trade Agreement (NAFTA).
- March 2018 – the U.S. introduced tariffs on steel (25%) and aluminum (10%)[CA1]. Canada, the European Union and Mexico were initially exempt, but these exemptions have since expired.
- This morning, the U.S. confirmed tariffs on $50 billion worth of Chinese goods, jeopardizing the world’s largest trading relationship.
The Trump administration is using the strength of the domestic U.S. economy (buoyed by budget plans and fiscal stimulus) to its advantage, to further its protectionist agenda. Moreover, recent polling gains will only embolden the administration as it seeks to solidify its voting base. Given that mid-term elections are in November, we expect the president’s moves to continue to make headlines.
Why this could be bad news
International trade is an important part of the global economy and has real implications for the economies in major trading nations like China, Germany, Japan and Canada. Fears of a significant slowdown in the global economy could cause markets to fall in anticipation of lower growth going forward, negatively impacting portfolio returns.
At the same time, trade tariffs directly impact consumers here and abroad as higher import prices are passed on, decreasing their purchasing power.
Real data paints a better picture
Despite the headlines and the moderating effect announced tariffs could have, the global growth story remains positive, supported by improving corporate profitability, low levels of unemployment, modest inflation and still accommodative financial conditions.
Despite trade chatter taking center stage since the beginning of 2018, new export orders in the U.S., Germany, France, the U.K. and Canada continue to expand. Although global manufacturing output has decelerated year-to-date, it remains elevated relative to prior years. We may see new export orders fall in the coming months, but the fact that exports are still in expansionary territory is positive and quite interesting given headlines.
Further evidence of global economic strength can be seen in the monetary policy announcements by the U.S. Federal Reserve (Fed) and European Central Bank (ECB). The Fed raised rates once again and all indicators point to further hikes ahead. The ECB, meanwhile, announced an end date for asset purchasing under its quantitative easing program (end of 2018). This is notable because most were expecting this announcement in July at the earliest, indicating ECB policy makers are confident enough to convey the message to markets now despite uncertainty around Italy’s political situation and global trade.
Positioning around the U.S. and the U.S. dollar
We continue to believe that the global expansion currently underway will remain intact throughout the year. That said, we also believe that the synchronized expansion we saw around the world last year to decouple somewhat, with a return to U.S. growth leading the way.
As a result, we have reduced some of our pro-growth positioning year-to-date. At this time, we continue to maintain higher allocations to the U.S., Germany, France and Japan, all countries we think will benefit from the ongoing global expansion. Overall, we continue to maintain an overweight equity position.
We maintain an overweight position in the U.S. dollar as well as we expect the gap between interest rates in the U.S. and the rest of the world to widen.
Hopefully we can celebrate more than the World Cup
U.S. trade penalties have so far had little impact on our portfolios. It is our hope that cooler heads will prevail and that leaders will come together in the same way countries are coming together for “the beautiful game.” No matter what happens though, additional headlines are sure to come as the President works his way towards mid-terms. As always, we will continue to monitor global trade dynamics as it plays out and make suitable adjustments to our strategy when appropriate.