US: Its all about trade – Rabobank

Analysts at Rabobank note that last week President Trump tweeted that China had been asked for a “one billion dollar reduction in their massive trade deficit with the US”.

Key Quotes

“Yesterday the FT reported that China had actually been asked to import more US cars, aircraft, soybeans and natural gas with the aim of cutting the bilateral trade deficit by $100 bln, which would represent more than a quarter of last year’s US good trade deficit.  Meanwhile China’s commerce minister Zhong Shan has questioned US data, stating that the estimate of the US-China trade deficit has been over-estimated by about 20%. That said, he indicated that China is prepared to greatly ease market access by dropping tariffs on such imports as vehicles and some consumer goods and further open services industries such as telecom and healthcare.  China explicitly stated that it does not want a trade war and that it will not start one.”

“On Friday EU Trade Commissioner Malmstrom stated that Europe shared the US’s concerns about China’s support for its domestic steel industry but indicated that tariffs were “not the right way to deal with it”. Having opened discussions over the weekend for exemptions for the EU, Trump called for Europe to “drop their horrific barriers and tariffs on US products going in” and warned “if you don’t do that, we’re going to tax Mercedes-Benz, we’re going to tax BMW”.  Canada, Mexico and Australia have secured exemptions on the tariffs of 25% on imported steel and 10% on aluminium, though the agreement for Canada and Mexico is conditioned on progress in the NAFTA re-negotiations.”

“While Mexican peso outperformed its EM peers last week, at the other end of the scale the Czech koruna was one of the worst performing EM currencies. Apart from softer than expected inflation that may result in the Czech National Bank refraining from raising rates further later this month, the risk of a trade war between the EU and the US is a major risk factor for the CZK. The automotive industry is the main pillar of the Czech economy. Last year car production rose to a new record high of 1,414mn making the Czech Republic the fifth largest carmaker in Europe and the twelfth largest in the world. Any measures that could potentially undermine demand for cars would be negative for the Czech koruna.”

“While full-scale trade wars would also have negative implications for other emerging economies that rely on external demand, it has to be pointed out that the EM currencies have coped relatively well with President Trump’s controversial decision to impose tariffs on steel and aluminium. It seems that the markets assume that a common sense will prevail and the worst case scenario of global trade wars will be averted. That said, President Trump rattled US trading partners who warned that they may retaliate, which could prove crucial for risky assets. At the very early stage of a new week EM currencies are broadly higher against the US dollar after the US labour market report reduced the odds of very aggressively Fed policy tightening this year.”