Tough talk on trade from the US has been unsettling markets. Last week the S&P 500 suffered its largest weekly slide since early 2016. And Chinese rhetoric is heating up too with Vice Premier Liu He warning Washington to expect a stronger response to the trade measures the Trump administration outlined last week.
Despite such fighting talk, there are promising signs that policy reality is still falling short of a trade war.
- The US has already significantly diluted tariffs on steel and aluminum. The exemption of the EU, along with Canada, Mexico, South Korea and others, means that two-thirds of the import tax on steel has now been suspended, and over half of the tax on aluminum.
- South Korea and the US have agreed to revise their trade deal. This six-year old arrangement was once described by Trump as a "job killer." Now the US Trade Representative Robert Lightizer said a "very productive understanding had been reached with South Korea.” This again suggests that the Trump administration’s bark may be worse than its bite on trade, a good sign during ongoing talks to renegotiate NAFTA.
- US Treasury Secretary Steven Mnuchin has said he's optimistic that talks with China could avert the need to impose tariffs on at least USD 50bn of Chinese imports. He said he was "cautiously hopeful" that China would agree to open up markets and "stop forced technology transfer."
So, we still believe that policy makers can avoid a major disruption to global trade. That said, hardball negotiating tactics from both sides can unsettle markets even if economic effects are muted. That could keep volatility high over the coming months.