- Trump is willing to esclate tensions no matter what
- If Canada joins new agreement, trump would toughen his stance
- Collapse of WTO may lead to recession
European markets are likely to remain under pressure today as Trump continues to attack the pillar of economic governance – the World trade organisation (WTO). He has assured the world that he is willing to escalate the trade war and not concerned about the consequences at all. He has taken one further, his latest message has ratchet up tensions for investors. Trump has made it clear that the US will withdraw from the WTO if the organisation does get things done his way. He criticised the organisation that it is not being fair with the US. Of course his statement is completely in conflict with the Commerce secretary’s view who tried to calm the market earlier in July by calling such policy talks a little premature.
According to the WTO trade report, the U.S does better in relative perspective in both cases; where it brings in cases against other countries (wining 91 percent of them time) and to those that are against it (wining 86 percent of time). However, Trump holds a different view on this and said that the country has only started to win some cases since last year. He strongly believes that the complaint settlement system is completely broken.
For investors, the biggest threat is that if the US pulls out of the WTO, the system could collapse. The absence of WTO means one to one agreement and a lot of retaliations based on fabricated sovereign issues. It opens the door wide open for global recession. Clearly, the US already has comparative advantage and the EU has been trying to overhaul the system to defuse tensions. The EU is already thinking of coming up with their own version of SWIFT payment system as it is tired of being caught between the battles that Trump is picking up with other countries.
Striking a deal today with Canada will have a significant importance for the US because the message would be clear and loud, we do not need NAFTA or any trilateral agreements. From here onwards, it is all about bilateral agreements and the US would toughen up its stance against the EU and China. Trump isn’t happy with the currency offer from the EU to eliminate tariffs on cars, this particular offer supported the market sentiment when it was presented as an option to the US president. Not accepting this offer shows, president’s administration clearly wants more from Germany. Trump hold a lot of grudge about the devaluation of the euro-zone currency.
Trump wants to move ahead with the planned $200 billion tariffs on Chinese imports and on top of this, he may actually take some actions about the China devaluing its currency its currency to support economic growth. The Chinese factory order data confirmed that the sentiment is still resilient to these shocks and today’s manufacturing PMI and non-manufacturing PMI numbers also supported this argument.