(Bloomberg View) -- President Donald Trump’s address at the Global Economic Forum in Davos, Switzerland, will be critical for investors.
If the Friday speech it turns out to be measured and calls for rules for ensuring free trade and a further opening of markets for U.S. exports and investments, the impact will be positive. If, however, Trump suggests that his administration is just getting started in introducing new tariffs and quotas to reduce the U.S. trade deficit, expect China, Mexico and the European Union to come out with tit-for-tat measures that could rattle global equity markets.
This was an eventful week even before the president's talk. In response to his decision to pull out of the proposed 12-country Trans-Pacific Partnership, the remaining 11 countries announced a trade deal that would exclude the U.S. Trade would be freer across those countries, even as U.S. exports to the new group become less competitive.
On Jan. 22, Trump made the first concrete move of his presidency on trade restrictions by imposing tariffs on solar panels and washing machines. The new taxes will affect China, a major exporter of both items, and South Korea, which exports washing machines. Since the tariffs will be on specific items rather than targeted at particular countries, expect the impact to be global across trade partners.
This week also brought proof that trade can be influenced not only with tariffs but by talking down the dollar as well. Treasury Secretary Steven Mnuchin said Wednesday that “a weaker dollar is good for trade.” This reversed a 22-year old policy statement repeated by successive Treasury secretaries -- whether they believed it or not -- that a strong dollar is in the U.S. national interest. The dollar fell sharply to a three-year low (chart below). The Dollar Index dropped below 90 for the first time since December 2014, and fell further on Thursday.
The tariffs on solar panels and washing machines, Mnuchin’s preference for a weak dollar and Trump’s Jan. 23 statement that he is prepared to walk away from the North American Free Trade Agreement all enhance the importance that investors should place on what the president says Friday.
The risk of a Chinese reaction is especially critical since the government has a history of responding to trade restrictions with moves of its own. This risk was recognized by Commerce Secretary Wilbur Ross at a news conference in Davos on Wednesday when he admitted that there is “potential for retribution and retaliation, and that’s up to the Chinese to decide.”
And how can China retaliate? Let us count the ways. The rapidly growing Chinese economy needs new aircraft? Forget about Boeing (NYSE:BA); Airbus would be better. General Motors (NYSE:GM) sales in China rose so much in 2017 that it sold more cars there than in the U.S.? Time to end that trend with new quotas and a campaign suggesting that Chinese buyers switch to Korean or Japanese automobiles.
And how about farm exports? “U.S. agriculture depends on trade,” Agriculture Secretary Sonny Perdue recognized in November. Unlike the overall U.S. trade deficit that Trump decries, the agricultural sector has consistently run trade surpluses. China rose to become the largest importer of U.S. agricultural products in the 2017 fiscal year. Retaliatory tariffs by China would severely affect farm states such as Nebraska and Kansas, and major U.S. agricultural companies could see global sales fall sharply.
Along with merchandise, countervailing action can be used to influence the category known as “invisibles” in the balance of payments, such as tourism. Chinese tourists spent more in the U.S. than visitors from any other country in 2016, according to the Commerce Department. Almost 3 million Chinese came that year, 15 percent more than in 2015; and they spent $33 billion, a 9 percent increase from the previous year.
The trade risk for U.S. markets has increased with this week’s developments. Trump’s address on Friday can either support the equity market rally that he sees as resulting from his economic policies, or increase global trade friction that damages the market he cares so deeply about.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Komal Sri-Kumar is the president and founder of Sri-Kumar Global Strategies, and the former chief global strategist of Trust Company of the West.