November 27, 2018
With talks of changing existing trade deals by then candidate Donald Trump now a reality with President Trump, America has taken a different path for international trade. Seeing mixed results during negotiations, global and domestic stock markets have been shaken and are subject to ongoing volatility. Today, foreign trade talks are in flux, and it’s unknown how different deals will affect the stock market in 2019.
Impact for U.S. Automakers’ Trade with South Korea
In the five years since the Korea Free Trade Agreement has been in effect, the Office of the United States Trade Representative (USTR) explains that the entire trade deficit grew to $9.8 billion in 2017, up 57 percent from $6.3 billion. Looking at goods only, America’s trade deficit with Korea grew by three-quarters during the same time frame, from $13.2 billion to $23.1 billion.
When it comes to trade with the Republic of Korea, recent negotiations have opened up additional export opportunities for U.S. automakers to maintain some domestic advantage, along with additional export opportunities to the Republic of Korea. Existing U.S. tariffs of 25 percent imposed upon South Korean trucks will last until 2041, instead of the original date of 2021. Other benefits from the renegotiation include South Korea allowing the doubling of American car imports to 50,000 annually.
Negotiating the New NAFTA With Mexico and Canada
The USTR also reported finalized negotiations as part of the United States-Mexico-Canada Agreement (USMCA), mandating that three-quarters of auto parts be produced in North America, including the United States. The deal also requires that 40 to 45 percent of auto parts be produced by workers making at least $16 per hour, increasing the likelihood that production is within the United States.
The renegotiating of NAFTA with Canada has preserved many existing tariffs, including those requiring that all food and agricultural products with zero tariffs under the North American Free Trade Agreement remain so. Furthermore, the USMCA has established additional markets and “new tariff rate quotes” for American products.
The new agreement is focused specifically on providing American producers of eggs, dairy and poultry with increased market access in Canada in exchange for Canadian agricultural producers having access to expanded markets in the United States for their dairy products, as well as peanut and processed peanut products, and sugar and sugar-containing products.
While negotiations with Canada and Mexico have opened more markets and promoted higher wages for workers within and outside America, the USMCA is still awaiting congressional approval. This new agreement has generated optimism for increased exports, higher profitability for businesses, and higher wages for workers that may stimulate consumer spending. However, there is less optimistic news when it comes to negotiating with China.
The USTR imposed $200 billion in tariffs of 10 percent on Chinese goods on September 24 of this year, which are scheduled to rise further to 25 percent on January 1, 2019, yielding total tariffs on Chinese goods at more than $250 billion. The impasse in trade talks shows that tariffs can hurt both consumers and businesses using higher-priced commodities on the other end, regardless of the trade partner.
One example is that while car manufacturers may benefit from increased export opportunities in the case of South Korea, with increased costs for labor and materials such as steel or aluminum, the increased opportunity of exports could be offset by having to increase costs for consumers or lower profit margins. Thus, the unpredictability of trade can negatively impact consumer spending and confidence, along with business earnings expectations, giving investors pause.