US: Prospects of a trade war have increased - BBH

According to analysts at BBH, the prospects of a trade war have increased given the US tariffs on steel and aluminum.  

Key Quotes

“However, at the last minute, President Trump shifted and opened the door to exemptions, including for Canada and Mexico.  Australia experiences a bilateral trade deficit with the US and cooperates in military matters, and may also be in line to be granted dispensation.”

“However, the fear of a trade war seems to be much greater than when Obama put tariffs on tires, and Bush slapped a 30% tariff on steel (with many exemptions).  However, outside of some symbolic moves, the most likely course of action based on precedent and game theory would suggest avoiding a tit-for-tat trade war, which would do more to weaken the multilateral trade order than the US tariffs.  Instead, challenging the US action at the WTO strengthens the rule of law and is strategically and tactically the most likely course.”

“The prospect of a summit between North Korea and the United States saw Japanese and Korean stocks rally at the end of the week.  On the one hand, the prospects of talks may be a sign of a de-escalation of tensions, which understandably supports risk-on strategies.  On the other hand, while the talks are a positive step, this likely simply marks a new phase.”

“North Korea has a chit, its intercontinental ballistic missile capability that draws the US’ attention.  The development of this power was done purposefully and not simply to denuclearize the peninsula.  After all, the US nuclear capability is so much larger than what is in South Korea.  The bottom line if there is a peace dividend to be found in Korea, there is much work to be done before it can be collected.”

“The concern about higher interest rates and a trade war did not prevent the US stock market from gapping higher before the weekend.  The NASDAQ closed at new record highs, completely recouping last month’s brief but sharp slump.  The S&P 500 also gapped higher, and it is testing the late February high, which is the main technical obstacle in the way of the record.”