Will the Trade Wars Ever End?
The battle with China over trade continues, with markets reacting to every change in tone. At some point, this is likely to stop because the markets become inured, not because of whatever agreement is reached. The battle over trade does threaten growth because some businesses will tend to defer investment until they know the rules of the game. Even so, a recession remains unlikely.
It appears China regretted whatever agreements had been reached, so it backtracked, and the parties are now at an impasse of unknown duration. Still, it is very likely that talks will resume, and ultimately, some sort of agreement will be reached. Nonetheless, China has a history of failing to fulfill its promises, which is precisely why U.S. negotiators are trying to include a provision in the deal that allows the U.S. to reimpose tariffs if China doesn’t live up to the agreement. However this particular issue is settled, it is doubtful that the trade conflict will be fully resolved. It is more likely that China delivers partially and hopes to get away with some form of its mercantilist policies.
The Chinese may choose to drag out the entire process in the hope a new government is elected in 2020. (This may not be the wisest course, since union supporters may demand that a Democratic Administration also pushes the trade issue.) But even if (or when) a deal is reached with China, it is very likely that this Administration’s attention will turn to Europe and Japan, both of which also engage in protectionist policies. And since we import many cars from Europe and Japan, and our auto industry is heavily unionized and resides in key election states, it is very likely that tariffs will be imposed on autos by this Administration before the election to press them into serious negotiations. So trade talks are likely to remain a major international issue for the visible future.
How much does this matter for the economy and the markets? Possibly a lot, by precipitating a recession, although that’s unlikely. Firms could defer some capital spending waiting for clarity on the trade front, but the solid expansion will press firms to commit to projects that they recognize must be done anyway. For example, pipeline companies can’t wait for policy clarity with China before they expand their pipeline networks to bring more oil and gas to market. They know that global demand for energy is growing and they will be able to sell oil and gas if they can bring it to market. In the meantime, policymakers here will do all they can to keep the expansion going. Even without help, the expansion enjoys considerable momentum. Inflation hasn’t erupted yet, despite low unemployment, which enables the Fed to keep interest rates low. So a moderately paced expansion is likely to continue, while the trade battle rages on. And at some point, the market will care less about it, as long as growth and profits continue to increase, which is why the market recovers fairly quickly after each trade headline-induced decline. Trade will still make the news, but the market is likely to become less sensitive over time.
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