US president Trump continues to pull the one lever he has wide control over. Trade.
Over the last 100 years, COngress has given the US president broad powers on trade legislative powers. The result of Trump's unilateral actions being the increased potential of a global trade war. Despite heavy opposition, Trump introduced tariffs on steel and aluminium imports. These new protective measures are on top of import tariffs already levied on solar panels and washing machines. Trump did water-down the punitive act by allowing exemptions for Canada and Mexico and offered the option of excluding other allies, backpedaling from an earlier 'no exception' position.
We have two thoughts about from Trumps aggressive 'take-no-prisoners' trade policy. First is the clear trend towards “economic nationalism” by protecting domestic manufactures from international competition. In the short term, depending of global retaliations, increases the likelihood of US economic slowdown. However, in the long-term, strong domestic manufacturers would limit the threat of an extended economic contraction and higher inflation.
Currently, nations are examining Trump's trade directive and weighing options. The EU seems to be heading towards not promising retaliation strikes, but entering negotiations to lower other EU import tariffs. Moving forward, should Trump continue to focus on cutting foreign-trade deficit, then the automotive sectors which accounts for 25% of the US balance-of-trade deficit must be considered a target.
Secondly, Trump's negotiation tactic, of pushing expectations to the extreme, only to reduce tensions at the last moment is a reoccurring theme. Investors should take this knowledge when pricing in MXN and NAFTA discussion. We have already witnessed significant de-celerations in threats. MXN is currently pricing in a sizeable risk premium for NAFTA and July presidential elections.
Left-wing Mexican presidential hopeful Andres Manuel Lopez Obrador has an 11-point lead over rivals on platform to review private oil contracts, challenge out corruption, and increase social spending without upsetting Mexico’s macro-economic strength. Barring any voting irregularities (not expected) a market friendly result. While development of TPP (without USA) will give Mexico a strong bargaining position. Given the current turn of events, we see MXN as undervalued and would see pricing as an opportunity to reload MXN long positions.
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