Thought October 16, 2019 / 09:27 am UTC

U.S. Trade Policy: Jekyll and Hyde

By Mike Gallagher

Optimism surrounding the U.S.-China mini trade deal needs to be tempered due to the reality of U.S. President Donald Trump's stance on trade. His administration is not yet willing to delay the December 15 tariff increase, unless China signs the phase one deal at the November 16-17 Asia-Pacific Economic Cooperation summit.

U.S. officials are also not clear on whether a trade deal would lead to a further delay in the proposed tariff increase or permanent cancellation of the increases that were planned for October 15 and December 15. This is an important distinction for financial markets and the Fed. 

The Trump administration may not be willing to cancel future tariffs yet, and it seems unlikely that the U.S. would be willing to reverse existing tariff increases, given the limited scope of the phase one deal. At the same time, the lagged effects of the summer tariff increases will still feed through to hurt the global economy in 2020.

The U.S. is also fighting trade battles elsewhere, including against the WTO,  as the U.S. believes that the WTO is too lenient on China. The U.S. is blocking appointees to the WTO appellate court, which will no longer be able to operate after December 10 once the quorum drops below three. Without appointments, the court cannot operate. And if that happens, trade experts believe that there will be a shift back to pre-1995 General Agreement on Tariffs and Trade (GATT) rules. Such a sequence is not good for world trade, as the GATT rules are less rule-based and more prone to manipulation by large countries. World trade growth and open economies could be big losers in the coming years. The collapse of the WTO appellate court could also send a bad signal to financial markets. 

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I, Mike Gallagher, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.