US: Trade and economic policy risks increase – Nomura

According to analysts at Nomura, three events today raise the likelihood that President Trump will follow through on his proposed blanket tariffs of 25% and 10% on steel and aluminum imports, and may more generally pursue a more aggressive trade agenda:

• President Trump stuck to his hawkish trade script during a press conference this afternoon.
• NEC Director Gary Cohn resigned, reportedly over trade policy.
• A meeting between President Trump and CEOs of companies that would be negatively affected by steel and aluminum tariffs was cancelled.

Key Quotes

“It appears President Trump will ignore the notable pushback from Congressional Republicans and key US trading partners. We believe a formal order on tariffs within the next one to two weeks is likely. Looking further ahead, today’s events also suggest the president may take a more aggressive stance with China over the upcoming 301 investigation into intellectual property policies. To put the relative trade issue in perspective, steel and aluminum products that would be covered by the proposed tariffs make up only 2.0% of US goods imports (as of 2017). By contrast, 21.9% of all US goods imports come from China.”

“In addition to trade, Cohn’s resignation also raises longer-term issues regarding President Trump’s advisors. Cohn has served as a moderating force within the White House on other meaningful policy decisions (e.g., tax reform and infrastructure). The choice of his replacement will be important. If the new NEC Director is similarly moderate on trade – such as Larry Kudlow, for example – he or she could serve as a counterweight to the trade hawks such as USTR Lighthizer and advisor Peter Navarro.”

“However, if a trade hawk such as Navarro was to replace Cohn, then the risks of major trade conflicts would increase significantly, in our opinion. While the 301 investigation focuses on intellectual property, the administration could impose sweeping tariffs on a broad array of Chinese imports beyond intellectual property.”

“Finally, the story that broke Cohn’s resignation also noted that President Trump had interviewed Cohn in recent weeks to replace Chief of Staff Kelly in the White House. His not offering Cohn the job implies that he is actively searching for a new chief of staff and could portend Kelly’s departure in the near term. As Kelly serves as another moderating force, this would be similarly negative, in our view, for the administration’s policymaking process.”