U.S. Policy Outlook for 2019: Trade Risks Continue, But Might Not Escalate

In our outlook for 2019, we believe politics and policy out of Washington will continue to drive – and in some cases, weigh on – markets, much like they did in 2018. Investigations and manufactured crisis are likely to contribute to uncertainty. Trade tensions persist, though on a more positive note, relations between the U.S. and China seem to be improving.

Trade policy

Back in early 2018, we flagged trade policy as a primary risk for the markets for several reasons: 1) The White House can influence trade policy largely without Congress; 2) Trade issues poll well with President Donald Trump’s base and 3) Most importantly, it is a policy issue on which President Trump has deep-seated and longstanding views.

One year later, we continue to believe that trade policy poses a risk to the markets. Foremost, we don’t think congressional ratification of the USMCA (aka NAFTA 2.0) will be straightforward under a Democrat-led House of Representatives. House Democrats tend to be skeptical of free trade deals, especially as they relate to labor and environmental issues. Also, we see little incentive for Speaker Nancy Pelosi to bring up the USMCA for a vote, thereby handing a win to the president. We would not be surprised if the president responds to any delay of a vote by following through on his threat to withdraw the U.S. from NAFTA, which in our view would be a risky strategy and would weigh on markets.

In addition to risks around the USMCA, we also believe that tariffs on autos and auto parts remain a possibility, with action, should it come, occurring this spring.

On a more positive note, relations between the U.S. and China seem to be improving. A commitment to keep negotiating would likely delay the March 1 increase of tariffs to 25% on $200 billion of Chinese goods. The Trump administration’s concerns regarding China’s industrial policy still stand (e.g., state subsidization of the private sector, forced technology transfer), but the president, who is sensitive to financial markets and economic concerns over the trade tensions, may be more inclined to take a smaller deal in the name of a political victory.

Fiscal stimulus

We estimate the fiscal stimulus from the 2017 tax bill and 2018 spending bill will contribute 0.4 percentage points to real growth in 2019, but we expect that stimulus to fade as the year goes on, and importantly, we do not expect additional fiscal stimulus at this point. An infrastructure deal is still possible, but the question of how to pay for it will invariably arise, not to mention we think the political window to get such a deal is relatively small – probably the first half of 2019.