Fearing Multi-Front Trade War, Trump Administration Backs Off Europe, Canada, Mexico

The Trump administration was keen on changing the narrative around trade Wednesday, that much seems clear.

All things considered, US equities held up ok in the wake of the president’s snap decision to end the ceasefire with China, but last week was still the worst stretch of the year for US stocks. The shrill rhetoric didn’t abate over the weekend, and Monday turned into a bloodbath.

Tuesday saw a rebound, but not because of any “optimism” on trade. Rather, hedges were monetized and profits taken on long vol. positions, while shorts were squeezed.

In an effort to keep the momentum going and change the trade narrative without looking “weak” on China, the Trump administration decided to delay auto tariffs for at least six months. That’s good news as it suggests at least someone in the White House is apprised of just how poorly risk assets would have reacted had the president piled car levies on top of the China story.

Read more: Trump Decides Now Not Great Time To ‘Rid Fifth Avenue Of Mercedes’

Apparently, Bob Lighthizer advised Trump that it would be wise to wait. “At a White House meeting on Tuesday officials firmed up the decision to delay [auto] tariffs for up to 180 days”, Bloomberg reported, citing two people familiar with the deliberations.

Shortly thereafter, Steve Mnuchin told lawmakers that the administration is closing in on an understanding with Mexico and Canada that will result in the removal of tariffs on steel and aluminum imports. “[Bob Lighthizer] is in active discussions” on the issue, Mnuchin said.

Lawmakers have expressed concern about ratifying the USMCA while tariffs are still in place and business groups have generally sided with Canada and Mexico in suggesting that the levies are a bad idea.

Around the same time – and if you’re starting to get the feeling some of this was a coordinated effort to bolster market sentiment – CNBC reported that Lighthizer is all set to show up to a meeting with Canadian Foreign Affairs Minister Chrystia Freeland with a proposal in hand that would pave the way for the lifting of the metals tariffs. That’s according to an unnamed “senior official.”

In case it’s not clear enough, someone over the White House thought it might be a good idea to avoid fighting a multi-front trade war just in case Beijing calls Trump’s bluff, effectively forcing the White House to go “all-in” by slapping tariffs on another $300 billion in Chinese goods next month. That still isn’t most analysts’ base case (although at least two desks that I’m aware of think it’s likely Trump will tax everything China ships to the US at some point during his first term), but it’s entirely possible he’s miscalculated by essentially pre-committing to another escalation. In the event Trump “needs” to follow through, it would be helpful if things aren’t careening off the rails vis-a-vis trade with Europe and Japan and if “new” NAFTA isn’t held up by the unresolved metals tariffs issue.

Asked Wednesday whether he was confident that the US and China will ultimately strike a deal, Mnuchin said he’s “hopeful”. “I wouldn’t say I’m confident”, he added.