The Trump administration’s turbulent trade war with the European Union took an unexpected twist last week. Appearing with European Commission President Jean-Claude Juncker, President Trump promised to refrain from further tariffs in exchange for some concessions from the EU: the purchase of soybeans and liquefied natural gas once the U.S. builds more export terminals. (The U.S. soybean market was severely impacted when China imposed tariffs on American imports in retaliation for tariffs imposed by the United States in early July.)
They also promised to work on lowering the existing tariffs on steel and aluminum (imposed by the U.S. in May) and “work out a deal to eliminate tariffs, non-tariff barriers, and subsidies on industrial goods, excluding autos.”
Positive Reception
This announcement surprised many, including Republican lawmakers, who “had no idea they were about to walk into a Rose Garden announcement on tariffs" but "welcomed the news.” In fact, many of the senators present that day were there to “relay messages from their constituents about how they would prefer markets be reopened than rely on additional government aid,” something the White House was also considering this week, suggesting $12 billion for farmers affected by the tariffs.
Wall Street responded in turn, with the S&P 500, the Nasdaq, and Dow all hitting session highs after the agreement was announced. The market has seen an increasing amount of volatility due to the uncertainty of these trade negotiations.
“In a nutshell, the market is continuing to be dominated by trade and earnings,” said Leo Grohowski, chief investment officer of BNY Mellon Wealth Management of New York.
This comes at a relief to many European countries, Germany in particular, who are major exporters of automobiles to the United States. The announcement also appeases many domestic brands. In response to Trump’s threat to further escalate tariffs, testimony from a hearing last week with representatives from car companies and foreign governments was “almost uniformly negative,” citing concerns regarding consumers, profits, and access to markets abroad.
Lack of Details Leads to Uncertainty
However, skepticism of the deal abounds. Though “it is a step away from the brink,” says Holger Schmieding, a German economist at Berenberg Bank, the deal lacks specifics. Without details on timeframe or plans for further talks, the announcement “raises the possibility that the negotiations could falter at a later stage,” according to Goldman Sachs.
Furthermore, Republicans also inquired about the temporal uncertainties of the agreement and if it would lead to a renegotiation of the North Atlantic Free Trade Agreement (NAFTA). They were assured that the aim was for a new NAFTA agreement to happen by early fall and that they would be filled in on smaller agreements “coming together, including with South Korea and South America.” Furthermore, the European Union did not promise to lift their retaliatory tariffs that came as a result of Trump’s actions on steel and aluminum.
Senior European officials are also still trying to understand the administration’s main goal with these trade talks. The New York Times explained that negotiators have been stymied, since “if the issue is lowering tariffs, the European Union has proposals ready to reduce them,” and that they worry about the president’s obsession with the trade deficit, “something that officials and economists say Europe is largely powerless to alter.”
If reducing the deficit is Trump’s main goal, talks could derail quickly based upon unrealistic expectations, something that has happened often in the past between the two parties.
Better than Nothing
Overall, however, this agreement seems to be a cause for cautious optimism.
According to James Nixon, the chief economist at Oxford Economics, though there is “massive uncertainty”, it is refreshing to see the White House engage in “a kind of multilateral relationship and trade dealings, which to be honest we haven’t seen from the United States yet.” Some of those surprised senators at the Rose Garden feel that despite the vague details of the deal, it’s at least a place to start.
“Our sense is the dominoes can’t start falling until the first one starts falling, but there are so many deals in the air right now that if you’re going to redo trade negotiations, you’ve got to have a beginning point,” says Senator James Lankford.
Image Credit: Maren Winter/Shutterstock.com