Global Trade: a positive step in US-EU trade relations, but not out of the woods – ABN AMRO

Bill Diviney, a senior economist at ABN AMRO, explained that the  European Commission President Juncker and US President Trump agreed overnight to enter into negotiations over trade policy, and to hold off from any further tariff imposition unless one of the sides pulls out of negotiations.  

Key Quotes:

“The two sides also agreed to consider rolling back the US’s steel and aluminum tariffs against the EU, and the retaliatory tariffs the EU has imposed. The agreement is light on detail, beyond vague commitments from the EU to import more soybeans and LNG from the US, but for President Trump, it is all about the optics, and his voters will likely view this news positively.”

“The agreement to postpone tariffs has come as a relief for markets, and equities and bond yields have risen accordingly. However, investors should continue to tread carefully, because the US was also negotiating with China some months ago, and those talks ultimately broke down with tariffs implemented. The chances of success with the EU are higher, as the source of tensions is less deep-rooted (with China, there are more strategic concerns over its ambition to rival the US in the tech sector). But a positive outcome is by no means certain. Meanwhile, there continues to be little sign of serious negotiations with China, where the threat of a further escalation in tit-for-tat tariffs remains serious.”

“With that said, our base case is that the direct macro impact of trade tariffs will be limited, and we expect the Fed to continue hiking in the interim (we project four further 25bp hikes). The chief risk to our scenario is if uncertainty over trade policy starts to significantly dampen business confidence, and in turn investment. Should that happen, we believe the Fed would likely pause in its rate hike cycle.”