US administration seems to change tone on trade – Wells Fargo

In view of the analysts at Wells Fargo Securities, Trump administration’s position regarding trade seems to have changed or morphed into a more benign view about the changes needed for trade to benefit the U.S. economy

Key Quotes

 “The global economic outlook has continued to improve as recent economic weakness has given way to more certainty regarding economic prospects. However, some uncertainties remain in place, especially those related to global trade, which was one of the most important drivers of economic growth during the first decade and a half of this century.”

“One of these uncertainties has to do with the new U.S. administration’s talk against international trade. However, we have seen that the Trump administration’s position regarding trade seems to have changed or morphed into a more benign view about the changes needed for trade to benefit the U.S. economy. That is, it seems that the changes being sought on NAFTA are more cosmetic right now and the changes do not seem to represent a threat for the trade agreement’s survival. This is a breath of fresh air in the discussion regarding international trade, which has been one of the political issues that have generated great uncertainty for the global economy during the last year or so.  One of the potentially most affected countries from the Trump administration’s rhetoric regarding trade is Mexico.”

“At the time of the November 8 presidential election, we expected the election results to generate a negative shock to Mexican economic growth and forecasted a mild recession for 2017. However, the information coming both from the Mexican economy early in 2017 and the Trump administration seems to be less taxing to the future of the Mexican economy and the trade relationship between these two neighbors. Thus, we have changed our view regarding economic growth for the Mexican economy and now have a growth rate of 1.2 percent for 2017 rather than a mild recession. Still, we believe that the Mexican economy will suffer some negative effects from the new political environment north of the Rio Grande, but those effects will be spread out over several years rather than affect the economy as a shock in 2017. A case in point was the mixed results for the Mexican economic activity index and gross fixed investment in January. While the economic activity index was higher than expected, the details were not as positive as the headline number suggested.”

“Meanwhile, gross fixed investment dropped in the first month of the year even though the details, in this case, were a bit better than the headline number. With this in mind, we expect a lower growth rate for the Mexican economy today than what we expected several years ago but no recession in 2017.”

“Still, uncertainties will remain in place for the global economy and for global trade as the policy of the Trump administration seems to be in flux today. With this in mind, Mexico is pushing forward its negotiations with the EU for an enhanced trade agreement with that region of the world. At the same time, Mexico has been looking at negotiating with Argentina and Brazil for an alternative source of corn imports, which is the most important input in the production of tortillas, a staple in Mexicans’ diets. Today, U.S. corn producers are the largest source of corn imports for the production of Mexican tortillas and are potentially one of the sectors that could be hurt the most by trade restrictions.”

“A second uncertainty that has been affecting the global economy has been the United Kingdom’s decision to exit the EU, or what has been called Brexit. In March the U.K. finally triggered the clause to leave the EU, a process that likely will take two years. Furthermore, the U.K. has been looking into the possibility of negotiating a free trade agreement with the United States and will probably need to do the same with many other countries as it reorients its external trade policy as an “independent” country rather than as a member of the European custom union. Thus, while there has been lots of talk about international trade lately what seems to be happening is a reorganization of trade across the globe rather than a movement away from trade, which, if true, would be a positive for the global economy.”