Moving from verbal protectionism to practical has proved to be more difficult for Trump than he expected. The struggle for trade surplus, as it turned out, can contain many unseen consequences, including it being devastating for the economic trade wars. The more Trump delves into the details, the more he realises that global trade has put everyone on the same boat and rocking it can be very dangerous.
The original blame to China and Germany for being global currency manipulators was swiftly taken back by Trump after the meeting with Chinese Premier Xi. Treasury department even issued a report in which it was said that China hasn’t been detected in currency manipulations. However, this week, Trump again became preoccupied with the trade imbalance, this time around with inferior partners – Mexico and Canada. Trade with those two countries is regulated by the largest trade agreement in the world – NAFTA. In the beginning of the week there were reports that Trump´s administration was going to unilaterally break the agreement, but on Wednesday the White House said that everything turned out to be “a lot more complicated” in the talks and the leaders of the countries are likely to save the trade union on new terms.
The NAFTA agreement was signed in 1994 and since then its trading advantages have led the US into a chronic trade deficit with Mexico and Canada. In 2015, with a trading volume of $545 billion, the US imported $11 billion more than it exported, while the trade deficit with Mexico was $63 billion with the total trade amounting to $525 billion. The main trade items under this agreement are automobile parts, production equipment, oil products and gas.
Changes in the trade agreement, or its possible termination, could potentially affect the Oil market, given that both Mexico and Canada share the import of US hydrocarbons in 38% and 7%. The automakers GM and Ford may receive the blow too, as they produce car parts in the neighbouring countries with cheaper labour. This has been an object of criticism for Trump since he took office. As an incentive to return jobs, the administration may impose a duty on the import of care parts or other similar measures under the agreement. However, the news that agreement may be retained already allowed the shares of both companies to jump by 1% on Wednesday. Also, numerous complaints by US timber companies have encouraged Trump to discuss a 20% duty on lumber imports from Canada, which is fraught with the aggravation of trade relations between countries and can even lead to a trade war.
Oil prices have already reacted with a decline, keeping the downward trend of Thursday despite the positive EIA data on US commercial supplies. With a forecast of -1.661M barrels, reserves have decreased by 3.641M barrels, imports have increased by 1.1M barrels to 8.9M.
A lull is seen in FOREX on Thursday, the EUR/USD holds near the opening in anticipation of the ECB decision. President Draghi will probably adhere to dovish rhetoric, but the increasing divergence with the FED and the growth of the euro zone will likely allow the ECB chairman to talk about raising rates. The Japanese Yen reacted with insignificant growth after the BoJ decision to leave the policy unchanged. The Pound continues to struggle for the psychological level of 1.30 in the absence of negative news on Brexit, acting on the news of the early parliamentary elections in Britain.
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