Despite Mexico Deal, US Will Continue to Play Hardball with China

European equity markets are set to move higher on Tuesday, following suit with Asia earlier today and Wall Street on Monday. Increased appetite for risk is driving stocks higher, boosted by the announcement of a new trade deal between the U.S. and Mexico.

According to reports, the U.S. and Mexico reached common ground on key trade terms on Monday, with Canada expected to re-join the negotiations on Tuesday. The new deal with Mexico is for 16 years, to be reviewed every six years. It still has to be approved by Congress. Additionally, according to U.S. Trade Representative Rob Lighthizer, the plan doesn’t cap imports of light vehicles from Mexico but does leave steel and aluminum tariffs in place.

The Ball is in Canada’s Court

In related news, Larry Kudlow, top economic advisor to the White House, said he hoped Canada would follow Mexico’s lead and agree to new trade terms, otherwise the U.S. might have to resort to auto tariffs to encourage its neighbor to the north to make a new deal.

“We hope Canada is watching carefully at how successful negotiations can go,” he said. “We really like a deal with them.”

“If we can’t get a good strong fair deal with Canada … the U.S. might have to resort to auto tariffs,” Kudlow said, citing a threat the president has previously made.

“Hopefully Canada will cooperate and move the ball in our direction,” he said.

Mexico Deal Doesn’t Mean Quick Resolution to US-China Trade Dispute

President Trump may give earned some political goodwill ahead of November’s mid-term elections, but that doesn’t mean the U.S. is willing to make any concessions in its on-going trade dispute with China. It may even encourage the U.S. to “dig-in” and play for a much better long-term deal.

According to economists at Dutch bank ING and John Woods, chief investment officer for Asia Pacific at Credit Suisse, “As far as China and Asia are concerned, the new Mexico deal solves nothing.”

Additionally, the Mexico trade deal, “strengthens the US position to play hardball with China,” they said.

The U.S. may have shown the willingness to concede in its negotiations with Mexico, but this will not be the case with China.

ING Economists are saying, “There is, right now, no visible interest from the US administration in pursuing talks with China over trade, and there will likely not be either unless China proposes some far-reaching changes to issues such as intellectual property protection and forced technology transfer,” the economists wrote.