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Zero Tariffs Reality

|Includes: SPDR Dow Jones Industrial Average ETF (DIA), FEZ, FXE, SPY, USDU

Zero tariffs reality close to impossible to achieve.

American commercialization vs the Europeans regulations.


Zero Tariffs. That was the highlight of the day. Towards the end of the US trading day, EU officials/POTUS announced that both the US and EU were working towards zero tariffs, zero non-tariffs barriers, and zero subsidies on non-auto industrial goods. It's still in a work-in-progress. At least the worst has been avoided, the escalation of trade tensions. This relief was very evident when US stocks shot up before the closing bell.

Firstly, they announced that zero tariffs was the end result, and no timeline was provided as to when would they would be able to achieve this. Knowing Trump's attitude towards free market, and EU's stubbornness in Brexit negotiations, the end result of achieving a complete free trade between the US and the EU is close to impossible.

Next, if in case free trade is achieved, the question is who will dominate. With the advancement of technology and the advantages of economies of scale, it will not take much time to turn a monopolistic market to an oligopoly. It is the American commercialization vs the European regulations. American producers are masters of commercialization (this is ironical because Europeans were the first one to commercialize). They will be able create goods, with more value, very suitable for the EU markets, leaving behind European producers. But, the Europeans producers have a home field advantage. The EU is a highly regulated market which creates many obstacles for new entrepreneurs to navigate through the market. With years of experience and having products that already satisfy the current regulations, it will be easier for them to introduce their existing goods, to the less regulated US markets.

Free trade will work the best, if accompanied by a free currency. And there lies the final catch. If free trade is achieved, and if markets are still relatively monopolistic, then the next issue would be the FED vs ECB. Having a weaker currency is the easiest way to create a trade surplus. All innovations aside, it's very hard to beat a cheaper good. Both central banks secretly prefer a cheaper currency, but are on their way to raise interest rates in their own respective countries. Both the US and the EU are heating up and it is imperative to control the monetary circulation, to control and channel economic growth. In future, currency strength will be an important factor in future is Trump really strikes any deals.

Lastly, all this talk make UK less important. If any positive do come out of these negotiations between US and EU, then Brexit negotiations will not matter much.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.