In this article, we’ll analyse President Trump’s ‘America First’ trade policy. Specifically, we’ll explore this doctrine in the context of ongoing US/China trade talks.
After you’ve read it, you’ll know how a trade deal could affect the Forex markets. You’ll also know how ‘trade war’ fears could influence market sentiment.
Here’s what the article covers:
- What an ‘America First’ trade policy looks like
- Why trade tensions exist between the US and China
- The likelihood of a US/China trade deal
What An ‘America First’ Trade Policy Looks Like
Before we explore a potential US/China trade deal, let’s look at US trade policy.
This is dubbed by many media outlets, such as NPR, as an ‘America First’ trade policy.
It refers to the campaign pledges of President Trump. Throughout 2016, the then-candidate promised to renegotiate many US trade arrangements to protect American jobs. Furthermore, he believes current trade treaties, such as NAFTA, are not fair to American workers.
What Has Trump Done?
Since being in office, President Trump has kept his word on ‘renegotiating’ trade.
In fact, upon entering office, President Trump immediately withdrew the United States from the Trans Pacific Partnership.
Commonly known as TPP, this is a trade agreement between Pacific countries. As explained by the BBC, it aims to introduce ‘tariff free’ trade between countries that border the Pacific.
However, critics of TPP point to the damage that globalisation has done to ‘rust-belt’ states, such as Michigan and Ohio. Traditionally, these states were manufacturing hubs, but these industries have since collapsed.
President Trump is also renegotiating the North American Free Trade Agreement. Usually referred to as NAFTA, this is a free trade agreement between the US, Mexico and Canada.
What’s The Truth?
So is President Trump right? Are existing trade arrangements and deals unfair to the US?
Well, it depends on what you’re looking at.
Firstly, let’s explore bilateral trade balances. President Trump claims that the US runs ‘trade deficits’ with many of its trading partners, including Canada, Mexico and China.
It means the US buys more than it sells to its trading partners.
Balancing these trade deficits is a priority for the current president. At face value, this seems sensible. Why wouldn’t the US want to ensure it sells as much as it buys from trade partners?
But this misses the point. In fact, having trade deficits isn’t necessarily a bad thing.
In the case of the US, its trade deficit is a reflection of over-consumption within its economy. Remember, the US economy is the largest in the world. Because of this, the US needs to import a high volume of goods to meet domestic demand.
However, President Trump could have a point when it comes to creating ‘level playing field’ between the US and its trading partners.
Let’s take China as an example. It’s much more expensive for a US auto manufacturer to export a car to China (25% import tariff), that it is for the reverse (2.5% tariff).
China also has strict rules on ownership rights, making it difficult for US auto manufacturers to manufacture in China. This has been detailed by Tesla CEO, Elon Musk.
Do you think the US & China should have equal & fair rules for cars? Meaning, same import duties, ownership constraints & other factors.
— Elon Musk (@elonmusk) March 8, 2018
Why Trade Tensions Exist Between The US & China
To address trade imbalances with China (and other countries), President Trump announced US import tariffs on steel (25%) and aluminium (10%) on March 1st 2018.
Keep in mind that China has a global reputation for producing ‘cheap steel’. Experts suspect that China’s steel production could be running at a loss and supported by the state. Clearly, this puts other country’s steel manufacturers at a disadvantage.
In retaliation, China introduced import tariffs of its own, including on US meat and wine.
This move has stoked fears of a full-blown ‘trade war’, which could hurt both Chinese and US businesses dependant on imports/exports.
However, in May 2018, we saw a concerted effort by both the US and China to cool tensions. In fact, President Trump and President Xi (of China) leverage their personal relationship to start trade talks.
The Likelihood Of A US/China Trade Deal
At this moment in time, it’s far from clear whether we’ll see a US/China trade deal. As documented by the South China Morning Post, a ‘framework’ appears to have been agreed between the two countries.
Yet, we’re still some way from a ratified treaty.
President Trump is also facing political pressure at home. Both Republicans and Democrats are keen to ensure a trade deal isn’t entered to in haste, especially if the primary focus is on reducing the US trade deficit.
Plans to lift selling restrictions on Chinese telecommunications company ZTE as part of any deal, is facing scrutiny. Trump originally banned the firm from selling components in the US, due to Chine ignoring Iran and North Korea sanctions.
ZTE is also has a reputation for intellectual property theft, as reported by TechCrunch.
However, it’s clear that President Trump recognises the importance of China as a geopolitical ally. Remember, we’re about to enter an interesting phase in the denuclearisation efforts of North Korea.
A potential summit between President Trump and Supreme Leader Kim Jong Un is scheduled for early June.
What Forex Traders Should Monitor
In my view, traders should look to exploit market volatility, should it look like a trade deal can’t be secured.
In this scenario, it’s likely we’ll see two phenomena. First, we’ll see sharp rhetoric from the US and China, which only add investor fears of a ‘trade war’. Secondly, we could see further retaliatory tariffs, which again will invoke market anxiety.
In the early stages of 2018, we’ve already seen how ‘trade war’ fears have put downward pressure on the US dollar, as this report from Reuters documents.
Recent history also tells a similar story.
After announcing US import tariffs on steel and aluminium, the US dollar fell to a two-year low against the Japanese yen.
Why Fools Ignore Trump’s ‘America First’ Trade Policy
In this article, we’ve explored President Trump’s ‘America First’ trade policy in relation China.
Particularly, we’ve explained how trade imbalances and US import tariffs have created tension between the countries. Plus, we’ve explained how recent talks between the two countries could lead to a new trade deal.
In addition, we’ve outlined how Forex traders can exploit market volatility, should fears of a ‘trade war’ resurface.
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