Sorting Through the “Trade War” Headlines
President Trump’s trade agenda has taken center stage following his impromptu announcement on steel and aluminum tariffs. We are now in for a period of uncertainty and renewed attention on NAFTA negotiations, additional tariff announcements, a potential “reciprocal tax” debate, updates to the CFIUS process (the committee that vets foreign investment for national security concerns), and the potential for retaliatory actions from United States’ trading partners. While this heightens the potential macro headwinds coming out of DC, we take a “wait and see” approach to these actions. These recent actions are likely to be met with some level of retaliation, but we think the impact could be mitigated as President Trump has shown a repeated pattern of pivoting should the circumstances dictate, and he has been more focused on the public relations battle on policy fights rather than being wedded to specific policy details. The future of Gary Cohn in the White House and concerns about a renewed populist tone in the lead up to the midterms will keep market attention on these actions.
Steel and Aluminum Tariffs
President Trump announced last week that he intends to impose a 25% tariff on imported steel and a 10% tariff on aluminum. The tariff is on imported raw materials and is set to apply universally (no countries are currently excluded). President Trump is imposing these tariffs using his so-called “section 232 authority,” which allows him to impose tariffs for national security reasons. President Trump and the Commerce Department have argued these tariffs are necessary to ensure there is adequate domestic steel and aluminum production should there be a national security emergency. As the tariffs become official, we will be watching to see if the administration will be convinced to exclude certain countries – an option that White House trade official, Peter Navarro, sent conflicting messages about over the weekend.
There has been considerable press speculation regarding the future of Gary Cohn, the chief economic advisor to the president and chair of the National Economic Council. It has been reported that Cohn announced that he may have to resign if the tariffs on steel and aluminum were put into place. The White House has hit back hard against these reports, and it seems that Cohn will attempt to influence any additional trade decisions. However, if he were to depart, we believe the market would take it as a very negative sign. Many investors we speak with have viewed the presence of a former Goldman Sachs executive within the White House as a pro-market and stabilizing force. If he were to depart, there would be real concern that the view he represents will further deteriorate and the pro-tariff, protectionist voices within the administration will win for the foreseeable future.
Trade enforcement has seen a notable uptick with the Commerce Department initiating 102 antidumping (AD) and countervailing duty (CVD) investigations since January 2017, a 96% increase from the last year of the Obama administration. In a significant change in trade dealings with traditional U.S. trading partners, the Trump administration has pursued enforcement actions against Canadian softwood lumber imports and at one point proposed a tariff as high as 300% on Canadian-manufactured aircraft. The increasing number of trade disputes comes as the administration renegotiates the North American Free Trade Agreement (NAFTA) and is reportedly considering rejoining talks for the Trans-Pacific Partnership (TPP), originally abandoned in the first days of the new administration. Having avoided significant retaliatory measures thus far, a blanket tariff on steel and aluminum imports may set off international countermeasures targeting U.S. exports.
Part of a Negotiation Pattern?
The recent actions taken by President Trump fulfill campaign promises and match a trend of looking to add uncertainty to negotiations. We have noticed a pattern where Trump looks to take actions that could potentially destabilize the opposition, hoping to create a situation where they feel they have more to lose than maintaining the status quo. We would also highlight the willingness of President Trump to pivot as necessary and he is not wedded to specific policy outcomes. He is seemingly more focused on the messaging battle than specific details. It still remains very possible that certain countries are excluded in coming weeks or other concessions are used as an opportunity for President Trump to declare victory.
Key Trade Actions
The Trump administration began a new era of scrutiny of U.S. trading partnerships with the U.S. withdrawing from TPP negotiations in the early days of the Trump presidency, given domestic job growth and industry protection concerns. The Trump administration later targeted NAFTA renegotiation for more favorable trading terms for the U.S., also not ruling out a full withdrawal from that agreement. On a macro level, both decisions are intent on greater domestic industry protections. A key negotiation point in the new NAFTA talks involves a “Chapter 19” dispute settlement provision which allows nations to challenge AD and CVD decisions via an independent panel.
The Commerce Department has engaged in various AD and CVD reviews in the past year, producing tariffs on imports of softwood lumber from Canada, solar cells and panels, and washing machines. Commerce also pursued a tariff of around 300% of Canadian-made aircraft imports, which was ultimately not approved by the U.S. International Trade Commission (US ITC). Now, the Trump administration appears set to impose a 25% tariff on steel imports along with a 10% tariff on aluminum imports. In response, the European Union is warning it could target U.S. exports, and China has specifically announced targeting U.S. soybean exports pending a final decision.
Most of the questions we have received recently have focused on the ongoing NAFTA negotiations. We had been of the belief that Canada and Mexico had to give the Trump administration something of symbolical value to allow the president to declare victory and avoid significant changes. Some of the changes we were looking for were some of the enhanced worker protections that had been included in the Trans-Pacific Partnership (TPP). The steel/aluminum announcement had destabilized these ongoing negotiations, and there is movement from Canada and Mexico to look to negotiate portions of NAFTA on a bilateral basis, hoping to incentivize the United States to provide greater detail on its demands. We could easily see the Trump administration providing an exclusion for Canada and/or Mexico from these tariffs in exchange for NAFTA concessions.
Additional Tariffs/Reciprocal Tax
With the political rise of Peter Navarro within the Trump administration, the trade agenda of President Trump has taken center stage. President Trump has been openly discussing additional tariffs and a “reciprocal tax” in recent weeks. A recent article by Axios indicated that the Trump administration is considering tariffs on possibly hundreds of products. We believe this is more rhetoric than reality, and any reciprocal tax would need congressional approval – which is extremely unlikely. However, President Trump campaigned on these issues, which was arguably a key to his electoral victory in the Rust Belt. We would expect more of this rhetoric and potential actions as we get closer to the midterm elections.
Congressional CFIUS Review
Parallel to the administration’s increased scrutiny of trading partnerships, Congress is taking steps to bolster reviews of foreign investment into the U.S. under the Committee on Foreign Investment in the United States (CFIUS). The Senate’s Foreign Investment Risk Review Modernization Act (FIRRMA) seeks to expand CFIUS review to certain joint ventures, minority position investments, and real estate transactions near military bases or national security facilities. It would also include emerging technologies under critical technology reviews and add further national security factors to be considered. CFIUS reviews have blocked or threatened to block takeover attempts by foreign firms, and could be seen as further protectionary measures outside of trade actions requiring response against U.S. industry.
Source: Raymond James Point of View | March 6, 2018
Source: Raymond James Research
Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or any forecasts will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.