Trump and Trade: What Are the Risks?

by: , CEO, Co–CIO, and Portfolio Manager, Epoch Investment Partners, Inc.; Kevin Hebner, PhD, Managing Director, Global Portfolio Management, Epoch Investment Partners, Inc.
  • President Trump has been an unabashed protectionist for decades, so it is no surprise that he has appointed the most hawkish trade team since Smoot-Hawley. Further, we believe Trump’s China-bashing team, which will be led by trade hawks such as Robert Lighthizer (U.S. Trade Representative), Peter Navarro (National Trade Advisor), Wilbur Ross (Commerce Secretary), and several others with equally-brazen views, should be taken literally and seriously.
  • Protectionist actions may begin shortly after Trump’s full trade team is confirmed. It is unfortunate, but D.C. is overflowing with China critics, so we envision China-bashing emerging as one of the few bi-partisan initiatives. If Trump’s trade team does indeed deliver on its protectionist promises, China’s retaliation will likely be immediate, forceful, and in-kind. (They have studied our pressure points.)
  • An acceleration of tit-for-tat protectionist measures is one of the biggest risks to the global market outlook. In terms of scenarios, we believe it is 15% likely that no protectionist measures are implemented during 2017–2018, 60% probable that moderate trade frictions occur, and 25% likely that a full trade war ensues. This would imply a greater-than-even chance of a global recession.
  • Countries most at risk from Trump’s policies include China and Mexico, followed by Japan and Germany. However, Japan aims to preempt such measures by investing a considerable sum in the U.S., increasing its defense spending and discussing a bilateral trade deal. The sectors most likely to be targeted include steel, aluminum, chemical products, tires, other auto-related products, and various types of manufactured goods.
  • Finally, and in spite of all this, we believe the case for globalization remains overwhelming (although more needs to be done for those who have been negatively affected) and that President Trump’s perspective reflects an erroneous, zero-sum view of trade. Displaying disdain for comparative advantage, which is one of the most profound and powerful concepts in economics, will ultimately hurt innovation, productivity, and employment.

“Patriotism, Jobs, and Trade“ is the pithy expression that best encapsulates President Trump’s economic priorities. Similarly, his guiding principle on policy formation can be best expressed by the rather straightforward question: Is it friendly to U.S. businesses? By bringing this pro-business perspective into the executive branch, the November election was clearly a real game changer and one that has elicited an understandably positive reaction from markets. However, in our view, many investors have been overly focused on the candy (tax reform, deregulation, and infrastructure), while paying scant attention to the spinach (protectionism and “the big rewind“).

The information contained in this blog post is distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The information contained in this blog post is accurate as of the date submitted, but is subject to change. Any performance information referenced in this blog post represents past performance and is not indicative of future returns. Any projections, targets, or estimates in this blog post are forward-looking statements and are based on Epoch’s research, analysis, and assumptions made by Epoch. There can be no assurances that such projections, targets, or estimates will occur and the actual results may be materially different. Other events which were not taken into account in formulating such projections, targets, or estimates may occur, and may significantly affect the returns or performance of any accounts and/or funds managed by Epoch. To the extent this blog post contains information about specific companies or securities, including whether they are profitable or not, they are being provided as a means of illustrating our investment thesis. Past references to specific companies or securities are not a complete list of securities selected for clients and not all securities selected for clients in the past year were profitable.

New York Life Investment Management LLC engages the services of Epoch Investment Partners, Inc., an unaffiliated, federally registered investment advisor. MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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William Priest, CFA

CEO, Co–CIO, and Portfolio Manager, Epoch Investment Partners, Inc.

Bill is Chief Executive Officer and Co-Chief Investment Officer of Epoch Investment Partners. He is a portfolio manager for Epoch’s global equity investment strategies and leads the Investment Policy Group, a forum for analyzing broader secular and cyclical trends that Epoch believes will

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Kevin Hebner, PhD

Managing Director, Global Portfolio Management, Epoch Investment Partners, Inc.

Kevin is a global investment strategist. Prior to joining Epoch in 2016, Kevin served as a senior FX strategist at J.P. Morgan Securities. Before J.P. Morgan, Kevin worked as a global investment strategist at Third Wave Global Investors, Citigroup Asset Management, and

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