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International Trade Negotiations That Could Affect the Market

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MICHAEL TOWNSEND: Today, we’re going to talk about trade, where there are a couple of major decisions coming up that investors should be tracking. First up, negotiations with China appear to be approaching the endgame. Treasury Secretary, Steven Mnuchin, and U.S. Trade Representative, Robert Lighthizer, headed to Beijing the last week of March for face to face negotiations. Top Chinese negotiators are expected to be in Washington for follow up talks in early April. If all goes well, the White House is hoping that President Trump will be able to host Chinese President Xi Jinping for a meeting and signing ceremony by the end of April.

Of course, that timetable may be optimistic. Trade negotiations are notoriously difficult, and the final stages of extended trade talks can be especially tricky. As of now, both sides agree that significant progress has been made, and both sides appear optimistic that an agreement can be reached. China recently agreed to boost U.S. imports and reduce the trade imbalance between the two countries, both key priorities for the White House. But, important discussions still remain on topics like how to enforce any deal, and the pace at which the two countries will unwind tariffs that they imposed on each other during the year-long trade dispute.

My sense is that the markets have been anticipating an agreement for weeks, so I don’t expect a huge market reaction to an announcement, though some positive reaction to an end to the standoff is likely. On the other hand, if talks were to collapse, or if a deal looks like it will be delayed past the end of April, that could increase market volatility.

The other big trade issue that is looming is a congressional vote on the U.S. Mexico Canada Agreement, known as the USMCA. This is the deal to replace the North American Free Trade Agreement, or NAFTA. The three countries signed the agreement late last year, but now the legislatures of all three countries must approve it. The timing of the vote in Congress, not to mention the outcome of that vote, is uncertain. Congress is awaiting a report from the U.S. International Trade Commission on the economic impact of the deal. That report is due in April. At some point after that, probably this summer, Congress will have to vote on the agreement.

Trade is one of the least partisan issues on Capitol Hill. Instead, it tends to matter much more to members of Congress how the specific terms of the deal impact businesses in their state or district. That’s why this vote is hard to predict right now. There are also a lot of newly-elected members, particularly in the House of Representatives, who have never taken a major trade vote. So, we don’t have a very good idea of where they stand. Some Democrats have expressed concern about environmental and labor protections, particularly in Mexico. There are also broad concerns about the tariffs on steel and aluminum that President Trump imposed in 2018, which spawned retaliatory actions by Canada and Mexico.

There are also political factors at work. Some Democrats, for example, don’t want to take a vote that might give a political victory to the White House before next year’s elections. There is no specific time table by which Congress must vote on this deal, but it probably needs to happen this summer, before Washington gets completely overwhelmed by the 2020 presidential campaign. Whenever it happens, though, this is a vote that the markets will be watching. A rejection by Congress of the trade deal would be a huge setback for the administration, and send the trade relationship between the three countries into uncertainty. So, investors should keep an eye on this one.

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