The evil of trade policy lives after it

Posted by: Paul Donovan

06 Jun 2019
  • Mexico had a bad day. US President Trump is unhappy with Mexican progress in trade talks. Two of the credit rating agencies (it does not matter which) did negative things (it does not matter what) to Mexico's credit rating. The peso weakened. But many of the problems are global and longer term.
  • Having a trade deal in place (NAFTA II) does not guarantee free trade ("read my lips, more trade taxes"). That will worry any chief executive investing in US-Mexican supply chains on either side of the border – something yesterday's Fed Beige Book seemed to acknowledge. Americans avoided some of the China trade taxes by shifting supply chains via Mexico. Mexican trade taxes mean the China trade taxes will hit Americans harder.
  • ECB President Draghi is more of a focus than the ECB policy decision today. Will Draghi follow Fed Chair Powell in signaling action if there is damage from trade taxes? Europe is hurt as uncertainty reduces investment – Europe makes and exports investment goods. However, it is hard for the ECB to offset uncertainty, or stimulate non-European investment.
  • The EU began punishment procedures against Italy for excessive deficits. This managed to produce the increasingly remarkable result of unifying the Italian government.

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