There is a tendency to exaggerate the lasting importance of events – data outturns, policy decisions and even elections can often turn out to have an ephemeral impact on markets, even if the initial market response to the news can be material. Trade tensions probably do not belong in this category. If the process of de-globalization does gather momentum, it is unlikely to do so in a smooth fashion. Protectionism is likely to arise in fits and starts, with periodic reversals as negotiations sometimes delivering de-escalation. Recent months serve as a microcosm of this process, mwith the pendulum of protectionism swinging back and forth several times.
By the end of May, President Trump had opened up a new front in the trade war, threatening to impose tariffs on Mexico, starting at 5% but theoretically building to 25% unless, and until, Mexico took action to stem the flow of illegal migrants into the United States. The timing mof this intervention was particularly important because the re-worked version of NAFTA – the United States-Mexico-Canada-Agreement (USMCA) – that Trump had engineered was in the process of being ratified by Mexico. A deal was done within days to avoid the tariffs, but the implicit signal to the rest of the world was clear: deals can always be revisited, truces may prove temporary. Finally, productive discussion between Presidents Trump and Xi at the G20 Summit averted the threat of an escalation of tariffs and signaled a partial dilution of the restrictions on Huawei.Read more Download the Quarterly Commentary