US: Resignation of Cohn has sent ripples through the capital markets – BBH

Analysts at BBH suggest that the resignation of Gary Cohn, one of the few "globalist" advisers in the US Administration, has sent ripples through the capital markets.  

Key Quotes

“Stocks have been marked down across the world.  The prospects of a trade war are also not good for growth and it may be adding to the pressure on yields.”

“Cohn's resignation has two immediate consequences.  As Cohn goes, so does the last-ditch effort of forces within the Administration seeking to deter the tariffs.  Treasury Secretary Mnuchin seems more supportive, though probably would have preferred a more targeted approach.  The industry summit Cohn was trying to arrange has been canceled.  That means that Congress is the next potential check on the unilateral trade power of the executive, which has largely been transferred from the legislative branch.”

“Second, we suspect that investors are also responding to the implications for future trade policy.  It means that the Ross and Navarro wing will set the tone.  This signals a more confrontational and aggressive trade policy.  The US reports the January trade balance today and it provides grist for their mill.  The US is expected to report a $55 bln trade shortfall.  The January 2017 deficit was $48.7 bln and in 2016 is was $43.4 bln.”

“This illustrates the broad deterioration, even though we know that there has been dramatic improvement in the energy trade balance.   Floating exchange rates and free-trade, they argue, should not result in the US have a significant and chronic trade deficit unless 1) exchange rates are not really floating and/or 2) trade is not fair.”

“However, the response to the US actions arguably are the key to whether it turns into tit-for-tat spiral.  This is surely one scenario, but is it the most likely?  First, we think about precedent. What was the response to Bush's 30% tariff on steel?  There were more exemptions then, including Canada and Mexico, and there was some protective action so that the sales were not simply deflected to a third party (e.g., Europe), and there were some symbolic gestures, and ultimately WTO challenges.”

“Second, we think through the strategic values.  By some measures, many high income and developing countries manage their trade and economies more than the US.  However, there is a general acceptance of the multilateral free-trading system, and nearly all countries are members of the WTO.  If the multilateral system is being challenged, it is incumbent on the other members to reinforce it.  In this case, it means there may be some symbolic action, like on whiskey from Kentucky, but the best course is to challenge at the WTO.  Some fear that if the case were to be decided against the US (may not for a year or more), the current administration would leave the WTO.  It is possible, but unlikely.  It would likely require Congressional approval, which would not be forthcoming.”