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Trade Wars: Is Trump Bluffing?

February 15, 2017 | Multi-Asset

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Among the morsels of information the market needs to digest in 2017 are the impact of a Donald Trump presidency on U.S. trade policy, and what Brexit could mean to free trade in Europe.

To help us navigate such geopolitical situations, we borrow from game theory. As part of that geopolitical analysis, we're assessing the key players' potential actions—such as bluffs and power plays—to try to better understand potential outcomes.

It's just like playing poker—there's bluffing and power plays. It's part of the game. It's part of the negotiating process. For example, Trump meeting with Taiwan before he became president and doing it without notifying China first was a clear power play.

It's just like playing poker—there's bluffing and power plays. It's part of the game. It's part of the negotiating process.

With respect to U.S. trade policies, Trump has put forward a seven-point plan:

  1. Withdraw from the Trans-Pacific Partnership (TPP)
  2. Appoint tough and smart trade negotiators
  3. Direct the Secretary of Commerce to identify every violation of a trade agreement and then pursue that violation
  4. Renegotiate the North American Free Trade Agreement (NAFTA)
  5. Appoint and instruct the Treasury secretary to label China a currency manipulator
  6. Appoint a U.S. trade representative to bring trade cases against China
  7. Use every lawful presidential power to remedy trade disputes if China does not stop its illegal activities

These are aggressive statements. But that’s what you would expect from a negotiation—aggressive statements being put forward.

While the TPP was not yet approved, his recent executive order formally withdrew the United States from the trade deal. But many of these other actions, he simply can't do. For example, he has said he would withdraw from the World Trade Organization (WTO), but that requires both the House and Senate to approve a joint resolution, which is unlikely. He can say he will pull out of NAFTA, but the problem is that each of the parties in NAFTA—Mexico, U.S., and Canada—must approve any change. That’s going to be a difficult process. Our Congress doesn't completely side with Trump on this issue and I doubt Mexico and Canada will jump on board.

The key is he put a lot of things forward. It creates uncertainty for trade and we don’t know how far he’ll push the actual negotiations, especially with respect to China. This uncertainty will need to be considered when building a portfolio.

When we turn our sights to Europe, the United Kingdom still needs to invoke Article 50 to start the process of exiting the European Union (EU) and then there's a two-year window for Brexit negotiations. In the end, we believe the resulting agreements will be bilateral in nature. It's not in the EU’s interest to beat up on the U.K. and risk potentially driving other countries out of the EU.

The EU doesn't want to be too aggressive in this negotiation, and they know they would be hurt if these trade agreements fall apart. Yes, there will be a lot of bluffing and power plays along the way.