As the first half of 2019 progressed, all signs
pointed to a resolution to the trade dispute between
the U.S. and China, leading to potentially stronger
growth in the back half of the year. This view was
based on the belief that the leaders of the world’s
two largest economies would be motivated to come
to a deal. President Donald Trump would be looking
for a strengthening U.S. economy heading into the
2020 election season, while Chinese President Xi
Jinping would want to claim a political victory ahead
of the celebrations to mark the 70th anniversary of
the founding of the People’s Republic of China later
this year. As we assumed, China has begun to stimulate
domestic demand in response to rising uncertainty
and a weakening economy.
However, Trump dropped a bombshell in early May
by announcing the U.S. would increase the tariff rate
on $200 billion in Chinese imports from 10% to 25%.
He also threatened additional tariffs on all remaining
Chinese imports, an estimated $250–$325 billion in
goods. China retaliated by announcing it would raise
tariffs on $60 billion in U.S. goods.
Furthermore, Trump threatened to impose tariffs on
imports from Mexico to force the country to curb the
influx of migrants from Latin American countries.
These actions have caused us to revisit our global gross
domestic product (GDP) forecast. We now forecast global
growth at 3.2% in 2019 with risks to the downside, a
slight downtick from our estimate 1Q of 3.3%.
As anticipated, the G20 Summit in late June provided
an opportunity for both sides to call a temporary truce
in an effort to return to the negotiating table. Trump
and Xi emerged from their meeting with an agreement to
delay any new tariffs on U.S. and Chinese products and
resume trade talks. We still believe a trade agreement will
happen before year-end. However, we also anticipate the
intensifying rivalry between the U.S. and China will be
with us for some time.
In addition, Trump’s position on Mexico occurred
while legislatures in the U.S., Mexico and Canada worked
toward ratification of the U.S.-Mexico-Canada Agreement
(USMCA), the replacement for the North American Free
Mexico became the first country to ratify the trade deal and
USMCA is not expected to face insurmountable hurdles in
Canada. The path to ratification in the U.S. could be rockier
as the Democrat-led U.S. House of Representatives wants
the deal to be altered to address key provisions on labor
and environmental standards.
We believe USMCA will likely be ratified in the U.S.
by the end of the year, but at what cost? Trump’s reliance
on tariffs as a negotiating tactic may have shaken the
confidence of U.S. trading partners, as it shows that tariffs
can be implemented even if a framework on a trade deal has
been reached. We also believe it could make China hesitant
to strike a deal with the U.S., knowing there’s a possibility
Trump could announce tariffs even if an agreement was
Ivy Live: Ivy’s Midyear Outlook: Rates, risks and rallies
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