Ahead of Wednesday's meeting with the head of the European Commission, Jean-Claude Juncker, President Trump's Twitter account has provided divergent proclamations about the merits of protectionism: “Tariffs are the greatest!” was swiftly followed by: “I have an idea. Both the US and the EU drop all tariffs, barriers and subsidies!”
The US president’s latest comments illustrate the difficulty of judging whether proposed tariffs will go ahead. We see three scenarios:
- President Trump’s calls to eliminate tariffs signify a willingness to step back from imposing more tariffs if the EU offers concessions. Our upside scenario, to which we assign a 35% probability, is that China or the EU offers concessions, resulting in a U-turn in the White House's recent uncompromising stance on trade.
- The latest pro-trade tweet proves to be just noise, and the president goes ahead with tariffs on auto imports as well as more levies on China. Trump has made similar pro-trade comments before, such as those before the past G7 meeting in Canada, and they have come to nothing. Our base case (60% probability) sees rounds of retaliation between the US on one side and China and the EU on the other, resulting in some kind of tariff on most trade between China and the US, and on auto imports into the US.
- Our risk case (5% probability) sees substantially higher tariffs and aggressive non-tariff actions, as well as other developed economies implementing restrictive trade policies to prevent unfair price competition.
Trying to second-guess the @realDonaldTrump Twitter feed is not an investment strategy. Given the uncertainty, recent rally in markets, and risk of further escalation, we retain a broadly neutral risk exposure in our tactical asset allocation. Investors should stay invested but consider and manage downside risks.
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