By Michael O’Neill

Trade war fears have captured the imagination of the media.  Headlines blare “Trade War Escalation,” “US Pressures China with Punitive Trade Measures,” and “Canada Left Out of NAFTA Talks.”  The doom and gloom are so pervasive that some believe they are hearing the thundering hoofs of the Four Horseman of the Apocalypse.  They should probably get their hearing checked.

The latest trade war fears have been around since Donald Trump became President.  He campaigned on “Fair Trade, Not Free Trade.”  It should not surprise anyone that he is acting on his promise.  For President Trump, China is “Public Trade Enemy Number 1.”

The US is upset about China’s restrictions on foreign investment, state-sponsored hacking, and intellectual property theft.   China does not allow full ownership in many sectors including car manufacturing.  China is accused of stealing intellectual property which includes inventions, designs, symbols, and literary and artistic works.  They reportedly demand the transfer of technology to Chinese business partners in turn for access to the domestic market.  Those demands led to estimated economic losses in the $225 billion to $500 billion range, according to the US Commission on the Theft of American Intellectual Property.

The United States isn’t the only nation with issues about China’s trade practices.  Over two years ago, the EU adopted the EU-China Strategic Agenda for Cooperation.  Its goals were to strengthen its relationship with China, engage China in a reform process, promote reciprocity and push for the timely completion of negotiations on a Comprehensive Agreement on Investment and an ambitious approach to opening up new market opportunities.

So far it appears it was all talk and no action.  The European Union (EU) is still upset about China’s lack of transparency, and  poor protection and enforcement of intellectual property rights.  They launched a WTO case against China’s unfair technology transfers on June 1, 2018.    The EU is also unhappy with China’s industrial policies and non-tariff measures saying they discriminate against foreign companies.  They also noted that government intervention gives state-owned firms a dominant position.

President Trump was less diplomatic in his approach.  It was clear (to Mr Trump) that just talking with China wasn’t getting any results.  He decided to act.  On June 14, he announced the US would impose a 25% tariff on $50 billion worth of Chinese goods imported into the country.  China said they would retaliate and they did.

On August 1, the President upped the ante.  He said the US would raise the tariff on $200 billion worth of Chinese goods from a previously announced 10% to 25%.  Those tariffs could go into effect as early as August 31.  The news had an impact in China.  Government officials were outraged, and China’s Shenzhen CSI 300 index fell over 6% in 48 hours, although it recouped some of those losses.  Chinese officials have said that they are open to dialogue, but with President Trump, they need to demonstrate some action.

Canada hasn’t escaped Trump’s trade wrath.  The NAFTA negotiations have devolved into bilateral talks between the US and Mexico.  Mexican officials indicated that they are close to an agreement on auto content.  Canada’s position on the matter is unclear as they were not invited to the meetings, despite asking to be involved.  

A few weeks ago, President Trump said that the US and Mexico may agree to a trade deal and that he would deal with Canada later.  Mexico countered that they were committed to NAFTA.   Prime Minister Trudeau embarrassed the President at his post-G-7 press conference, and it doesn’t look like Trump has forgiven him.  Canada is still under the threat of a 25% tariff on cars, and a new NAFTA agreement is still a long way off. 

Renegotiating the NAFTA agreement has proved to be difficult, but it pales in comparison to the United Kingdom’s exit from the European Union, the so-called Brexit.   The UK Government, led by Theresa May released a “white paper” of its Brexit proposals in mid-July.   They plan to develop a broad and deep economic relationship with the EU while ending free movement of citizens.  They want to avoid having a hard Irish border and do not want anything to do with EU institutions.

The EU Chief Brexit negotiator rebutted Ms May’s proposals, claiming that Britain wants “free movement of goods but not people and services.  It wants to apply EU customs rules without being a part of the EU.”  At this stage, it appears the negotiations will be acrimonious.  Sterling has suffered.  GBPUSD has retreated from an April peak of 1.4330 to 1.3017 on August 2, 2018.

The Canadian dollar could suffer the same fate if the NAFTA negotiations collapse or if the US slaps 25% tariffs on cars.  Hysteria sells newspapers and attracts viewers to newscasts, but until the rumours become a reality, it is just a tempest in a trade teapot.