A Trump Trade War Is The Last Thing Wall Street Needs

Let's maybe not blame Canada.
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The mainstream media focuses its attention on the Trump Administration’s most colorful characters, even if they are rendered ineffectual by their passion for infighting and talent for exacerbating scandals, like the recent Rob Porter debacle, with poorly coordinated and easily refuted misinformation campaigns

(Trump image courtesy Flickr user Gage Skidmore)

But the executive branch is still staffed with a handful of talented bureaucrats, chief among them U.S. trade representative Robert Lighthizer, who has spent the past year doggedly pursuing the Trump Administration’s central promise to renegotiate NAFTA to win more favorable terms for U.S. companies and workers, or to withdraw from the trade bloc altogether.

Lighthizer is, unlike many of his colleagues, no political neophyte—he served as Deputy U.S. Trade Representative under Ronald Reagan, during the time period when the 40th president, despite his reputation as a staunch free trader, thwarted free-market forces to bring down the U.S. trade deficit through a series of diplomatic negotiations with Japan and other major trade partners, known as the Plaza Accords.

For the past twelve months, Lighthizer has been engaged in hard-nosed negotiations with Mexico and Canada, hoping to force the U.S. neighbors to accept new rules that require NAFTA-compliant automobiles to be 50% comprised of parts made in the U.S., and to cut back on the ability of Canadian and Mexican companies to win U.S. government procurement contracts. Publicly, Canadian officials have been optimistic about progress made in the penultimate round of talks held Montreal last weekend, with chief Canadian negotiator Chrystia Freeland saying that the round of talks “surpassed expectations,” despite calling U.S. demands “unprecedented.”

Such happy talk is even being dispensed by Canadian Prime Minister Justin Trudeau, who spent the last weekend mounting a charm offensive in California, hoping to build public support for maintenance of the trade agreement. The lefty Trudeau even stooped so low as to lavish praise on the right-wing icon, U.S. president number 40, during a visit to the Ronald Reagan Presidential Foundation & Institute in LA last Saturday. But behind the scenes, Canadian officials have been leaking to the press a much grimmer picture, with Reuters reporting last month that negotiators north of the border are “increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA.”

From a strictly political point of view, pulling out of NAFTA makes sense. Criticism of the deal was a cornerstone of Trump’s 2016 campaign, and polls show that more than 80% of Trump voters see NAFTA as a bad deal for America. What’s more, as Trump’s poll numbers sink, he has been increasingly concerned with keeping his base happy, as their avid support is what gives the president leverage over Capitol Hill Republicans, who in turn can protect him, for the time being, from aggressive Congressional oversight, which could well be his undoing.

It was this dynamic that led the President to withdraw from the Paris Climate Accords over the objections of Corporate America and more moderate elements in his own administration, and reporting by Axios’ Jonathan Swan over the summer indicates the president is desperate to make a big splash on the trade issue as well, demanding that his otherwise reluctant economic team to bring him significant tariffs for him to institute.

The best argument that Administration moderates like Gary Cohn and Steve Mnuchin, who have been pressing for a cautious approach on trade reform have been able to make is that new tariffs, or rash moves like pulling out of NAFTA would cause stock markets—the president’s preferred measure of success—to fall. Indeed, a recent analysis by Oxford Economics predicts that a U.S. withdrawal from NAFTA would cause the S&P 500 to fall by 5%.

But Oxford also points out that the U.S. has much less to lose from the dissolution of the trade union than either Cananda or Mexioco, because the American economy relies much less on international trade than its neighbors. This is the sort of leverage the president delights in, and it’s entirely possible that Lighthizer and other hardliners in the administration could convince the president that walking away from the pact is the best way to both play to his base, and to ultimately secure better terms down the road.

Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.

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