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Extended Stock Market Plunge May Force Trump to Reconsider Trade War

Extended Stock Market Plunge May Force Trump to Reconsider Trade War
Sergio Lacueva | Dreamstime.com

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Friday, 23 March 2018 08:06 AM Current | Bio | Archive

Yesterday turned out to be quite a busy day.

Starting with tax policy, on Wednesday, U.S. Trade Representative Robert Lighthizer told a House committee that the U.S. is negotiating with Argentina, Australia, and the European Union and will soon begin discussions with Brazil. He also indicated exemptions may be in line for Canada, Mexico and South Korea, depending on the progress of broader trade negotiations with those nations.

So, at least for now, U.S. consumers of, for example, European and Korean steel and aluminum will not in fact be taxed. That effectively means that the steel and aluminum tariffs have been revoked for the time being as all the major steel and aluminum exporters to the United States are exempted from the tax hike.

If large U.S. allies get exemptions, then the punitive weight of the metals tariffs will fall on Russia and China, which the Trump administration has identified as national-security challenges, together with some other countries including some in Asia and the Middle East.

One could wonder about the reaction to that from the hard-hatted steelworkers who were applauding the tariff-signing ceremony at the White House only a few days ago.

However, now that President Donald Trump has signed the executive memo on trade with China, the taxes on American consumers who buy goods partially made in China are going ahead with some delays in implementation and no certainty about which specific sectors are going to be affected.

The delays might be seen as an opportunity to scale back these tax increases and undoubtedly there will be lobbying in that regard.

In the meantime, after yesterday’s down day in the U.S. markets, overnight we have seen a huge sell-off in Asia reflecting investor fears over U.S.-China tit-for-tat measures after China has responded with taxes of their own.

Perhaps the most effective form of lobbying could be the reaction of the equity markets.

President Trump seems to value the equity market as an indication of success.

The drop in equities on the news of his moves on China may be the most effective means of lobbying against those tax hikes, also known as tariffs.

Besides that, there was also U.S. spending. The U.S. government will not be shut down at midnight as a deficit-financed spending bill was passed by Congress.

As it is a deficit-financed measure, this is really more economic stimulus. Economic stimulus is probably not that necessary at the moment, although the spending is not going to hit the economy immediately. Trump's trade taxes are a negative for the economy, albeit in a relatively small way so far, which the stimulus will offset.

Finally, from the U.S. there was news of yet another senior departure from the administration with the National Security Adviser H.R. McMaster to be replaced by former U.N. ambassador John Bolton, who will become Trump's third national security chief in 14 months.

In a direct sense there is no market impact as the National Security Adviser has little to do with economic policy. However, markets may be concerned about the uncertainties surrounding future policy. McMaster's departure is the fourth senior departure in 3 weeks.

There are geopolitical concerns that Bolton was suggesting a first strike against North Korea and is a noted hawk on Iranian policy.

However, financial markets do not generally price in extreme geopolitical risks.

Perhaps, what financial markets will focus on most is the general sense of unconventional staffing with more extreme ideas, which makes policy less predictable and potentially therefore more unsettling for investors.

Meanwhile over in Europe, European Union (EU) leaders carry on chatting together in Brussels having decided to take a somewhat hostile style tone towards Russia over the UK chemical weapon attack.

The question for markets is whether there will be further sanctions applied.

Today we have also various Federal Reserve speakers with Raphael Bostic President of the Atlanta Fed, Neel Kashkari President of the Minneapolis Fed and Robert Kaplan of the Dallas Fed.

Now that Fed Chair Jerome Powell is less likely to provide intellectual leadership on economic policy than the other Fed Chairs, paying attention to other members of the Fed is going to be more important from now on for Financial markets.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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President Trump seems to value the equity market as an indication of success. The drop in equities on the news of his moves on China may be the most effective means of lobbying against those tax hikes, also known as tariffs.
stock, market, plunge, trump, trade, war
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2018-06-23
Friday, 23 March 2018 08:06 AM
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