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International Trade: What’s Going on With NAFTA and China?

Most signals coming from the U.S. economy have been extraordinarily strong over the past year.  Unemployment has neared all-time record lows, GPD growth is tracking to be close to 3% in 2018 and inflation has remained subdued.  It is no wonder that the past few years have been a good time for stocks and the broader financial markets.

But what is out there that could trip up the robust economy that we are seeing today?  We are constantly on the lookout for data that might suggest a different picture of economic health.  And one of these potential headwinds is international trade—specifically, the potential for a trade war between the U.S. and one of its major trade partners.  Let’s review the two trade relationships that have received the most press in recent months: NAFTA and China.

Originally signed in 1994 as a trade agreement between the U.S., Canada and Mexico, The North American Free Trade Agreement (NAFTA) has been a centerpiece of U.S. trade policy for almost 25 years.  President Trump has recently begun renegotiating NAFTA, with the hope of creating a new deal.  As a placeholder, the U.S. has recently struck an updated trade deal with Mexico and Canada that largely keeps in place the old NAFTA terms.  However, President Trump is pushing for a totally revamped trade deal, called the USMCA, which is likely to be voted on next year by Congress.

For the time being, the terms of trade between the U.S., Canada and Mexico are keeping with the status quo.  The financial markets have welcomed this news.  What we don’t know yet is the outcome of a broader update to NAFTA, which will likely happen next year.  And though some of the details in the new trade deal have yet to be negotiated, the broader consensus among the international trade community is that a deal very similar to NAFTA, encouraging free trade between our neighbors to the north and south, will be signed next year.  Stay tuned.

With respect to China, things are slightly more worrisome.  President Trump campaigned on a promise to renegotiate trade terms with China, from a perception that the U.S. was being taken advantage of by unfair trade practices.  To some extent, the President has a point.  Particularly with regard to intellectual property, which is a real frustration for U.S. companies who have lost trade secrets and proprietary technology to Chinese firms that have not respected international patent and copyright law.

Though there are portions of our trade relationship with China that need work, a large scale trade war between the U.S. and China would be almost universally bad for everyone involved.  Tariffs on Chinese goods would make consumer products in the U.S. more expensive for U.S. consumers.  These proposed tariffs would almost certainly be met with counter-actions by China on U.S. goods and services, hurting domestic companies doing business abroad.

If there is one potential short-term event that could be a major road bump for the U.S. economy, it would be a trade war with China.  We hope that the White House, and Congress as well, consider the wellbeing of the U.S. economy before launching any new tariffs or trade actions against China.

There is still a relatively good chance that we are able to resolve our differences without a trade war, so the future is not necessarily grim.  We hope the politicians in Washington have the good sense not to end what has been a tremendously positive economic cycle.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted.

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