Whatever you do, don’t confuse the “Trump trade” with “trade under Trump.”
The “Trump trade” simply refers to investors’ remarkable penchant for frontrunning the reflation trade. There’s considerable danger in that strategy. If you front load equity strength and reprice yields as though the new administration’s policies have already been implemented, you create a situation where markets are “priced to perfection” going into a period of heightened policy uncertainty. That’s dangerous for obvious reasons.
“Trade under Trump” refers to the protectionist, antagonistic policies the incoming President has promised to adopt on the way to making better trade “deals” with the likes of Mexico and China.
As I noted on Thursday evening, “they say you can tell a lot about a person by who they associate with. If that’s true, then Donald Trump might well try and make good on his bombastic rhetoric regarding China and trade. Indeed, the choice of Peter Navarro as trade czar speaks volumes about the new President’s intentions.”
With all of that in mind, consider the following from Deutsche Bank whose latest commentary reiterates all of the points made above and looks ahead to what Trump can do and how quickly he can do it.
Via Deutsche Bank:
The risk of a more strident approach to trade from Trump has risen, with Cabinet appointments suggesting the President elect could follow through on threats made on his campaign trail. Asia’s high dependence on exports, large contribution to the US trade deficit, large proportion of manufacturing goods in export baskets, and integration in global supply chains puts the region squarely in his path. However, higher commodity prices, strengthening global PMIs and potential for conciliatory responses from Asia could be potential offsets.
Trump appointments suggest he could walk the talk The trinity of Wilbur Ross (Commerce Secretary), Peter Navarro (National Trade Council), and Robert Lighthizer (US Trade Representative) all lean protectionist. Navarro and Ross coauthored a paper in which they discuss proposals to “eliminate America’s chronic trade deficit” through renegotiating bad trade deals, challenging trade cheating and currency manipulation, and pushing back on the WTO’s “unequal treatment of America’s income tax system”. Navarro is a noted antiChina hawk, having authored a book titled “Death by China: How American Lost its Manufacturing Base.” While Lighthizer comes with three decades of welcome trade negotiation experience, he has spoken in favor of tariffs and could be more aggressive with the WTO.
What might Trump do? Protectionism has already been on the rise with global trade volumes stagnating. US tariffs have already stopped falling and US imposition of countervailing duties has been going up. Under Trump, there appear two possible avenues for further trade action: imposition of tariffs via an Executive Order, or a more involved border-adjustment tax. Tariffs would most likely involve invoking Section 122 of the Trade Act of 1974; while these would only be effective for 150 days without Congressional approval, they could be enacted immediately with a senior Trump official recently suggesting 10% tariffs were being considered.
Don’t expect that to do much in the way of helping to turn around the following rather disturbing trend:
(Chart: Deutsche Bank)