The summit between President Trump and Xi has been pushed back while trade negotiations continue but Trump said the negotiations are ‘going incredibly well’ while China’s state news agency pointed to ‘substantive progress’: the market is still expecting a deal to resolve the impasse. However, the US hard-line approach to trade and tariffs looks likely to continue with the US likely turning their attention to other trading partners.
A ‘section 232’ report from the US Department of Commerce on February 17 opened the door for President Donald Trump to impose 25 percent tariffs on auto imports on national security grounds: the President has 90 days to make a decision on this. Moody’s estimate that ‘US tariffs of up to 25% and corresponding retaliatory actions from the US's major auto-trading partners would disrupt about $500 billion of trade flows’ which they estimate accounts for 2.8% of 2017 world imports and 0.6% of 2017 world GDP. Any impact is likely to be most brutal for Japanese, Korean, Mexican and German manufacturers.
In its latest economic outlook the OECD also warned on potentially negative impacts from auto tariffs on the EU: ‘Motor vehicle exports represent around 10% of total EU merchandise exports to the United States and there are significant supply-chain linkages within Europe that would spread the impact widely across countries and firms.’ Moreover, the impact would be particularly keenly felt given how weak growth currently is: the latest OECD forecasts are for Euro area growth of just 1% in 2019 rising to 1.2% in 2020 and for Germany to grow at 0.7% in 2019 reaccelerating to 1.1% in 2020. Moody’s estimate that auto tariffs of 20-25% could reduce Germany’s annual growth rate by 0.2% per annum in 2019 and 2020 but note the effect could end up being larger if an escalation in trade tensions really hurts investment.
In July 2018, following the US imposition of steel and aluminium tariffs and a threat of auto tariffs, President Trump and EU President Jean Claude Juncker announced an initiative to work towards improved trading relations in a number of areas. However, progress seems to be slow and the EU wanting to exclude agriculture in the trade talks is an area of contention for the US. Trump continues to apply pressure recently commenting: ‘We’re trying to make a deal. They’re very tough to make a deal with - the EU’ and that ‘If we don’t make the deal, we’ll do the tariffs.’ For us, protectionism still remains a significant risk to the global growth outlook.