Trump's trade stance rekindles market volatility

President Donald Trump's increasingly tough trade stance has raised a lot of eyebrows on Wall Street and around the world in recent weeks. That's especially the case with the issue likely to be featured prominently in his first State of the Union address on Tuesday night. 

Headlines related to the topic have flashed across trading screens, in many cases contributing to market volatility in currencies, bonds and equities. They've touched everything from NAFTA negotiations to threats in the Chinese media that Beijing may consider pulling back on its purchase pace of U.S. Treasury bonds. 

The dollar's recent weakness has been in focus as well, notably with Treasury Secretary Steven Mnuchin's comments at the World Economic Forum in Davos last week that a dollar devaluation could boost U.S. exports and thus may be desirable. Those comments were subsequently walked back after attracting the ire of trading partners across Europe and Asia. 

In terms of hard action, the Trump administration's decision to impose tariffs on imported solar panels and washing machines generated a lot of rhetorical heat, but it's likely to have only a modest impact, according to Capital Economics, given that the percentage of U.S. imports subject to trade protection barriers has increased steadily since 2013. 

And yet imports to the U.S. have increased 7 percent during Mr. Trump's first year in office. 

The risk is that the president ramps up the protectionism, especially against China, which his administration has accused of a list of sins, including stealing intellectual property. The tariffs of up to 50 percent solar panels and washing machines drew a sharp rebuke, with South Korea reportedly set to complain to the World Trade Organization, while China is still considering its response.

The folks at Gavekal Research warn that in his State of the Union message, Mr. Trump could outlines plans for import restrictions in steel and aluminum, and expand sanctions and tariffs on Chinese technology, curb investments in the U.S. by Chinese companies, limit Chinese student visas and call for other measures. 

The consequences of these potential actions worry the analysts at Oxford Economics. 

First, protectionist measures could isolate the U.S. and result in further weakness in the dollar. This, along with higher tariffs, would boost the price of imports and thus overall inflation for U.S. consumers and pinch corporate profit margins, especially for retailers. And America's trading partners are likely to retaliate with their own protectionist measures, damaging the sales growth of export-oriented companies like Boeing (BA). 

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.