Schwab’s Jeff Kleintop on Trump and trade: “the only thing we know for sure is that the TPP is DOA.” Photo: Charles Schwab

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.  

And Trump’s vow to name China a currency manipulator? Kleintop said that process could be “really drawn out.” He also said that China “seems to be excited about talking with Trump” on trade issues, joking that “maybe they think they could get a good deal” with him. The death of TPP is “music to Beijing’s ears, so they’re thrilled,” partly because China was not only not a TPP signatory to begin with but also because the trade deal’s intent was to offset China’s growing trade power.

Regarding a President Trump’s ability to “invoke import surcharges” on China, he could do so by executive action for up to 150 days, but Kleintop thinks that step unlikely. What Trump might do, he said, would be to “instruct the Commerce Department to look at certain” products imported from specific countries that he deems are unfairly priced “and impose some countervailing duties.” While “the market might react significantly to those steps,” that process would also “take time.”

Trump has called for lowering U.S. corporate taxes, but is that a red herring, or do lower corporate taxes help promote economic growth? “We can see direct evidence of that in Ireland,” Kleintop said, “where GDP has clearly benefited” from companies that have moved their headquarters and other operations to the country,” but suggested that lowering those taxes alone would not be a major economic stimulator. Kleintop suspects that more significant tax reform will be “slower to gain traction,” citing the Senate being so “closely divided” between Democrats and Republicans, since any broader reform “requires bipartisan support.”

As for trends shaping the global economy, “I think the bigger question for 2017 is what happens with French and German elections,” Kleintop said in the interview. “Could there be some surprises there next year?” citing the rise of Trump-like populist figures and political movements in those countries.

A potential bellwether sign for the European economy could happen much sooner: the Italian referendum on Dec. 4 of this year. That vote—to change the Italian constitution to reduce the power of the lower house of the Italian parliament—has widely been seen as a career-staking reform move by Italy’s youthful prime minister, Matteo Renzi.

However, polls in Italy have shown little signs that the referendum will pass, and Trump’s victory has been cited by the opposition parties in Italy, the Five Star Movement and the Northern League, as a sign the stars are aligning against Renzi, 41, and his reforms. Should the Dec. 4 vote “go against Renzi, will he step down?” Kleintop wondered. Would those triumphant parties call for Italy to leave the EU, in what is commonly called “Italexit?”

“Europe,” suggested Kleintop, “is a place worth watching.”

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