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2nd Quarter Forecast Courtesy of Stratfor.com

2nd Quarter Forecast Courtesy of Stratfor.com

The administration of Donald Trump has said it would “level the playing field” of the global economy. To that end, the United States will pursue bilateral talks with its trade partners in hopes of more effectively asserting its interests. These efforts could include any number of measures, from creating the regulatory conditions needed to encourage U.S. companies to invest at home to pressuring other countries to buy more American goods, invest more money into the United States and end currency policies that, according to the White House, give others an unfair advantage. The United States has set it sights on countries with which it has large trade deficits, placing China, Japan, Germany and Mexico squarely in its crosshairs. The U.S. Treasury Department’s biannual review of top U.S. trade partners’ currency policies, which will be released in mid-April, will shed more light on how Washington intends to pursue its allegations of currency manipulation abroad. (The White House has criticized Germany, China, Taiwan, South Korea and Japan for their currency policies and has threatened to challenge currency manipulation as a type of export subsidy in the World Trade Organization.)

The Trump administration’s tactics have left many U.S. trade partners wondering whether Washington would even be willing to honor the WTO’s rulings if they undermined U.S. interests. Openly flouting the organization, after all, would cripple the global trade order that the United States has underpinned for more than seven decades — something Washington will not be willing to do, even if it uses the threat of challenging the WTO to shape its trade negotiations and target key industries. In fact, the White House’s aspirations to more strictly enforce existing global trade rules are contingent on the WTO’s ability to govern effectively.

Nevertheless, the concerns the White House’s rhetoric has generated are enough to compel several major economic powers to band together against U.S. protectionism. A formidable group of free trade advocates is prepared to see cases through lengthy WTO deliberations and will try to present a unified front in defense of the WTO-led trade order. The G-7 summit in Italy on May 26-27 will offer the group a chance to stand their ground against Washington’s protectionist policies this quarter.

In the meantime, other countries will seek out deeper trade relationships among themselves as Washington’s interest in multilateral free trade agreements fades and its debate over border tax adjustments continues. Perhaps unsurprisingly, the biggest push for new ties will come from the United States’ closest trade partners, such as Mexico, Canada and Japan. They will revive long-stalled trade talks, including the tabled free trade agreements between the European Union and Japan and Mexico. Despite the parties’ renewed enthusiasm, however, many sticking points remain that are liable to drag out the negotiations.

As they search for new trade partners abroad, these countries will still have to prepare for greater friction with the world’s superpower in the months ahead. For those with deeper pockets, promises of investment will may temper U.S. trade tantrums and coax Washington into broader strategic discussions. Of course, these carrots will also be paired with sticks that don’t involve trade that are designed to give Washington pause in picking its fights.

But for the United States and China, strife may be difficult to avoid as their most critical imperatives collide. Washington has targeted Chinese goods in hopes of rebooting the U.S. economy, but Beijing is already working (though struggling) to address the structural inefficiencies in its economy, all while consolidating political power under President Xi Jinping. Moreover, as the Chinese government prepares for the Communist Party Congress later in the year, caution will trump haste in any reform it may pursue. Even so, the United States will focus this quarter on enforcing the existing trade rules of the WTO through anti-dumping and countervailing duties, paying particular attention to Chinese industrial imports. China, in turn, will be quick to link the mounting trade pressure to security issues on which Washington needs Beijing’s help, including North Korea’s nuclear program. China also won’t hesitate to leverage its military and economic heft in in its ongoing maritime disputes.

Germany, for its part, cannot withstand the shock of a trade war with the United States as it struggles to hold the European Union together. Like China and Japan, Germany will continue to tout investment deals that create American jobs, hoping to deflect U.S. pressure while forming a multilateral front in defense of free trade. But Berlin will also be preoccupied with fateful French elections this quarter, whose outcome could accelerate the eurozone’s demise.

Lacking the financial leverage of its richer counterparts, Mexico will make for an easier target for the White House, especially since the country relies heavily on its trade with the United States. During the second quarter, the Trump administration plans to trigger the 90-day consultation process required to renegotiate NAFTA — talks that are meant to be a template for reshaping its other trade deals. The United States will center its negotiation points on increasing NAFTA’s rules of origin requirements, expanding labor and environmental regulations, and integrating energy and the digital economy into the deal. Mexico, meanwhile, will concentrate on drumming up a strong U.S. lobby, made up of American states and businesses that depend on cross-border trade, to argue against substantial changes to the bloc.

 

Excerpt reposted courtesy of Stratfor.com

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