President Trump’s Mexico Trade Deal a Look at the Future

President Trump’s Mexico Trade Deal a Look at the Future

President Trump’s Mexico Trade Deal a Look at the Future

  • President Donald Trump has sidestepped conventional processes, protocols and procedures in trade negociations

Last Monday, the US reached a preliminary trade agreement with Mexico that addresses several American grievances. A similar deal with Canada may also to be on track.

These breakthroughs, combined with an easing of tensions with the EU, could allow a more coordinated approach to the toughest trade problem of them all, that is reaching agreement with China.

This is good news for investors who worry about a global trade war that would derail growth and undermine corporate earnings.

Important questions remain, and how they are resolved will ultimately determine the extent to which trade policy durably influences growth and asset markets.

President Donald Trump has upended long-standing approaches to trade negotiations by sidestepping conventional processes, protocols and procedures.

As I have suggested, the best analytical approach for understanding the new state of global trade is game theory. In particular, by thinking of different strategies and outcomes in a world where a traditionally cooperative game is being played uncooperatively.

The US was destined to win this new game because of its economic strength and diversity, entrepreneurial agility and lower relative reliance on external markets. How long it would take for it to prevail depends on how quickly other players come to terms with a new reality, including The Trump Administration’s willingness to risk economic damage and its embrace of a negotiating stance that shows less respect for established practice and cordial relations with allies.

As such, acceding to US demands would not be the best outcome for others but would still be much better alternatives to a full-blown trade war.

This helps explain why Mexico and the EU softened their stance.

It also is the reason why Canadian Foreign Minister Chrystia Freeland rushed to Washington this week to try to meet The Trump Administration’s negotiation deadline. These developments also suggest that it’s only a matter of time before China softens its position, especially now that there are improved prospects for a joined North America-European position on Chinese practices on intellectual property rights, joint venture requirements and some non-tariff barriers.

Yet there are three issues investors should keep in mind before totally discounting a trade war, one of the four major external threats to the markets and the global economy, along with the more uncertain international outlook, the more general normalization of central bank policy and the aftermath of the currency crisis in Turkey.

Details and implementation matter.

Key details of the US negotiations with Mexico are worked out, as well as finding a way to incorporate Canada in a revised regional approach.

Reaching agreement with the EU may be even more complicated.

Plus, ll these steps will require approval by Congress. Once that is secured, the US will be better able to focus on leading a coordinated Western approach to pressing China on some trade grievances.

The negotiations with China could be a “Reagan Moment”: In terms of growth potential, the deal with Mexico, and the potential agreements with Canada and the EU, are likely to be tweaks to the international trading system, not a major revamp. International trade would still be free and would be viewed as fairer by the US

But the global system as a whole would not be materially impacted by America’s deals with allies.

China could be a different story: A comprehensive understanding could transform the landscape, creating the possibility for significant changes and benefits. Indeed, it could even be the trade equivalent of the geopolitical transformation President Ronald Reagan ultimately wrought in the 1980’s by entering a military buildup race with the Soviet Union.

Managing the risk of collateral damage and unintended consequences: Trade confrontations are not without cost. Although the Trump administration is getting its way, its approach has a meaningful risk. In international economic relations, soft power and trust can matter a great deal, especially when America’s leadership of the global economy has eroded, endangering the benefits to the US of its long-standing prominence.

The preliminary US agreement with Mexico reached August 27th  improved the probability of avoiding a global trade war. It could be a step toward a still-free but fairer trade system if it is followed by agreements with Canada and the EU.

This is good news for the global economy and markets. But the more decisive transformation for the trading system could only result from breakthroughs in the negotiations with China. These are at very early stages.

By Mohamed A. El-Erian

Paul Ebeling, Editor

Editor’s Note: Mr El-Erian is the chief economic adviser at Allianz SE, the parent company of Pimco. His books include “The Only Game in Town” and “When Markets Collide.


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