Key upcoming dates mean that U.S. trade tensions could soon get worse
Markets brace for anti-market sentiment from Italian populists
Key upcoming dates mean that U.S. trade tensions could soon get worse — U.S. trade tensions could soon get worse as two key dates approach. The public comment period ends this coming Tuesday (May 22) for President Trump’s 25% tariff on $50 billion worth of Chinese goods, after which the administration is free to go ahead and implement that tariff at any time they choose. That would almost certainly spark China’s retaliation with a tariff on $50 billion of U.S. goods, which in turn would activate Mr. Trump’s threat to slap a tariff on another $100 billion of Chinese goods.
Meanwhile, Europe’s temporary exemption from U.S. steel and aluminum tariffs expires in just two weeks on June 1. The Trump administration could grant another extension. However, if the Trump administration goes ahead and implements the tariffs on European steel and aluminum on June 1, then Europe is already prepared with a retaliatory tariff on $3.3 billion worth of U.S. products.
Both China and Europe are largely stonewalling President Trump at present since they appear to believe that if they cave in now, Mr. Trump will simply come up with a new round of demands. The only way to essentially stop the process is to let Mr. Trump go ahead with his initial tariff blow and then retaliate in kind, making it clear that there will be a price to be paid each time Mr. Trump launches a tariff assault. For that reason, the U.S. could be exchanging tariffs blows with China and Europe sooner than the markets might suspect.
Yet the Trump administration has reason to avoid a reciprocal tariff volley ahead of the upcoming North Korean summit on June 12. The Trump administration would undoubtedly like to keep the deck relatively clear in June in order to pay full attention to the North Korean summit, which is of much greater strategic importance to the U.S. than trade complaints. The Trump administration may therefore delay any serious tariff threats until after the North Korean summit.
There is also the possibility of at least a limited U.S.-Chinese trade deal this week during ongoing meetings with Chinese Vice Premier Liu He, President Xi’s right-hand man on economic and trade policy. Chinese President Xi has already made clear that he wants to save ZTE Corp, China’s second largest telecom producer, from the death sentence imposed by the recent U.S. sanctions, meaning China might be willing to make some concessions. Indeed, there were reports late Thursday that China is willing to meet Mr. Trump’s demand for a $200 billion cut in the U.S.-Chinese trade deficit. However, it seems unlikely that there will be a comprehensive U.S.-Chinese trade deal this week that addresses all of Mr. Trump’s China-trade complaints.
If Mr. Trump wants to go ahead with his trade tariffs on China and Europe, he may want to do so soon because he will otherwise run headlong into the November mid-term elections. China and Europe both realize that all they have to do to get Mr. Trump’s attention is threaten to slap tariffs on U.S. agriculture products, thus hurting Mr. Trump’s political support in rural areas of the U.S. ahead of the November mid-term elections, where control of Congress (and perhaps Mr. Trump’s future) hangs in the balance. If Mr. Trump is going to slap tariffs on China and Europe, he might want to do that sooner rather than later to reduce the political fallout for the November mid-term elections.
Markets brace for anti-market sentiment from Italian populists — In normal times, the markets can function as a successful check on ill-advised economic moves by politicians. If a government takes a significant misstep, then a plunge in the stock market or a surge in bond yields can quickly grab their attention and force them to move toward a more rational course.
One example of the political discipline that can be imposed by the markets is the 7% plunge in the Dow that occurred on Sep 30, 2008 when the House of Representatives surprised the markets by failing to pass the $700 billion TARP rescue bill during the financial market crisis. Only after the stock market plunged did Congress wake up to the extent of the crisis, causing them to grudgingly pass the bill and allow the financial system rescue to proceed.
There is also a well-known quote from Clinton-advisor James Carville who said, after the 10-year T-note yield soared by 300 bp in 1994/95 due to budget deficits, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
The Italian populists, however, have clearly not gotten that message, displaying outright hostility to the markets this week and treating them as the enemy rather than the referee. The Italian bond yield this week soared after Five Star and the League included in an early policy platform the ideas of reneging on 250 billion euros worth of Italian bonds held by the ECB and creating a mechanism by which a country could exit the Eurozone.
League leader Matteo Salvini responded to the negative market reaction by saying, “They are trying to stop us with the usual blackmail of rising spreads, falling stock markets and European threats. This time, change is coming.”
Five Star and the League did finally remove those inflammatory ideas from later policy drafts but the damage had already been done. The markets will now maintain a higher risk premium in Italian assets since the populist politicians that are taking control of the Italian government clearly have little respect for fiscal propriety or appreciation of the risks of a Eurozone exit.