US: Trade war saga in play – BBH

According to analysts at BBH, the proximate cause of investor anxiety is the prospect of a trade war as the US is perceived to be defecting from the multilateral trading system that it was instrumental in creating. 

Key Quotes

“The media and some other observers seem to be too ready to project the worst-case scenario and insist offering militaristic imagery as it did repeatedly with the foreign exchange market and so-called currency wars.”

“The fact of the matter is that there are nearly always low-grade tensions between trade partners.  The US and Canada are among the largest trading partners in the world, and there is a constant tension, which incidentally pre-date the Trump’s presidency.   Lumber and dairy, for example, are nearly perennial areas of dispute.  In the middle of NAFTA negotiations, Canada has filed an omnibus case against the US at the WTO.  Moreover, as coverage of the exchange between Trudeau and Trump illustrate, there is a disagreement on the size of the bilateral trade balance (as there is with China).”

“The US provocations and the initial response by China (and other US trading partners) is relatively benign.  A relatively small part of trade is being impacted, and the retaliatory steps seem symbolic.  The counter-measures are the bare minimum of what should have been expected, given past experience (precedent) and what we think is the strategic response to the ostensible threat posed by Trump.  Specifically, limiting the damage of US actions while at the same time strengthening the multilateral system requires avoiding a downward spiral of recriminations and allowing the conflict resolution mechanism at the World Trade Organization.”

“In the 1980s, Japan was the rising Asian power that challenged that US economic prowess.  Several of the senior trade officials in the Trump Administration got critical experience in the Reagan Administration.  The WTO organization, however, prohibits some of the policies the US pursued then, such as Voluntary Export Restrictions and Orderly Market Agreements.  China has a wider range of options available, and unlike Japan, is not dependent on the US for security.  At the same time, Japan found, as the US did in the post-WWII environment, other countries protectionism may spur short-term challenges but offers strategic opportunities.”

“In response to US protectionism, Japan moved auto plant and production to the US.  Car parts followed shortly after.  Japanese domestic producers moved up the value-added chain.  US provocations may spur Chinese reforms, which ultimately will likely be beneficial for China and President Xi’s agenda. A more robust defense of intellectual property rights is necessary for a modern dynamic economy.”

“The US and other countries have been haranguing China on this issue for nearly twenty years.  China’s tariff schedule can also be reduced to the benefit of its own economy.  China’s leadership seems prepared to respond to the US provocations in part by objecting, playing up the risks of a trade war, defending the multilateral trade system, making some low-scale expressions of displeasure, and seizing the opportunity to pursue long-awaited reforms.”