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November 11, 2016 at 09:37 AM
As part of his “Contract With American Voters,” presidential candidate Donald Trump called for a host of unilateral trade policy shifts, but should President Trump follow through on those vows, what would be the effect on the global economy?
Schwab chief global investment strategist Jeffrey Kleintop said in an interview on Friday that “the only thing we know for sure is that the TPP is DOA,” referring to the 12-nation Trans-Pacific Partnership trade deal promoted by President Obama. Congress has not acted on the treaty, and Trump consistently criticized it.
So would that executive decision, and Trump’s other planned trade moves, be positive for the global economy? Kleintop admitted that “there’s some risk there; protectionism is on everyone’s lips,” but concluded in a research note on Friday that “if Trump does choose to make good on his anti-trade proposals, the impacts may be negative, but perhaps not enough to trigger a global recession.”
In the interview, Kleintop suggested of Trump’s trade rhetoric “that the bark might be worse than the bite.” So to be clear, would a “trade war force a global recession? Not likely,” concluded Kleintop.
However, Kleintop thinks the voters may have more to say about economic growth and the markets, especially in Europe, starting with Italy’s national referendum on Dec. 4 followed by elections in France and Germany.
On the investing implications, Kleintop said that “markets tend to dislike uncertainty; in this case they’ve taken a balanced view” on Trump’s surprise election, showing they’re willing to give Trump “the benefit of the doubt,” though he expects “volatility to remain in place.”
He sees an unrelated bright spot in the “turnaround in corporate earnings that should help the economy and stocks” as companies start so spend more. The energy sector is also poised for a rebound, helped along by any Trump actions to benefit oil and gas exploration, production and transmission. Trump’s election signals a “good shift for traditional energy companies,” with the caveat that “more production could weigh on prices.”
What about Trump’s other trade target, the North American Free Trade Agreement, or NAFTA? Kleintop admitted that while a President Trump “has the authority to withdraw from NAFTA” unilaterally with 60 days notice, the actual process would likely be more complex and time-consuming. If the U.S. did withdraw from NAFTA, it would be a particularly “big deal for Mexico,” which has a trade surplus with the U.S. According the Census Bureau, the U.S. is running a $46 billion trade deficit with Mexico year-to-date; the deficit was $60 billion in 2015. Mexico, Kleintop said, would “struggle” with any rearrangement of trade ties with the U.S.
