Hitting when it hurts
Kathrin Forrest, MA, CFA, Portfolio Manager, SLGI Portfolio Management
Anthony Wu, CFA, Senior Portfolio Analyst, SLGI Portfolio Management
Opinions as of December 3, 2018
On November 30, leaders of the U.S., Mexico and Canada signed USMCA, which will replace and “modernize” NAFTA. While perhaps not taking victory laps on the trade front, Canada was able to take a sigh of relief at the end of September, when USMCA was agreed to in principle. This followed 14 long months of negotiations and uncertainty. The agreement is now headed for ratification in respective legislatures. We’re sure to see some further politics in the process, including here in Canada, where ongoing U.S. tariffs on steel and aluminum imports may raise eyebrows.
China’s technology act unchanged
Beyond our own backyard, trade discussions remain in full swing. There is of course China taking center stage, including this past weekend at the G20 in Buenos Aires where, despite a 90-day deferral of U.S. tariff increases, deep fault lines remain. These have been exposed for some time, and were reemphasized on November 20 with the U.S. Trade Representative (USTR) issuing its “Update concerning China’s Acts, Policies And Practices related to Technology Transfer, Intellectual Property and Innovation.”
The document details U.S. objectives and concerns in these regards and concludes, “China fundamentally has not altered its acts, policies and practices, and indeed appears to have taken further unreasonable action in recent months.”
Interestingly, the document refers to the European Union and Japan “who share many of the concerns expressed by the United States.” Both have not been immune in the review of their trading arrangements with the U.S.
The EU in particular has moved into the crossfire in recent weeks. The EU is an important trading partner for the U.S., ranking first as an export market, and accounting for 22.8% of the overall U.S. trade deficit in goods in 2016, according to the USTR. Things looked promising towards the end of July, when U.S. President Donald Trump and EU President Juncker issued joint press statements outlining a number of cornerstones in “a new phase in the relationship between the two countries."
Work appeared to progress as Trade Ministers from the U.S., Japan and the EU issued a joint statement in late September, reiterating their shared objective to address non-market oriented policies and practices of “third countries,” a not so subtle reference to China.
Autos – EU pulls over, Germany passes
More recently though, discussions have turned chilling. Following a meeting with U.S. Trade Representative Robert Lighthizer, European Commissioner for Trade, Cecilia Malmstrom, alluded to retaliatory tariffs, should the U.S. impose tariffs on cars and trucks exported to the U.S. Since then, the chatter around auto tariffs has gotten louder. Reportedly, German car executives are invited to the White House on December 4, potentially leaving EU trade negotiators watching from the sidelines.
All this is hitting the EU on top of ongoing issues around Brexit and Italy’s fiscal goals. Economic fundamentals have also turned markedly mixed in recent months. In particular, business and consumer sentiment have retracted, and growth of real GDP, along with forward-looking corporate profit estimates, have decelerated. Not surprisingly, European equity markets have underperformed their U.S. counterpart. Ongoing political noise does not particularly help the investment case.
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