G-7 may look like a hot mess, but it doesn’t matter — trade wars do

World leaders may not like the tough “America first” message President Donald Trump is sending on trade and other issues, but their awkward lack of harmony at a tense G-7 meeting doesn’t really matter.

What does matter is how they end up dealing with trade issues, and whether positions harden prematurely, leading to trade wars rather than negotiation. Every country in the group has felt the recent sting of U.S. tariffs, and there have been counter moves to get back at American farmers and producers.

“I was very encouraged by today’s market action. I would not have been surprised at all going into this G-7 that the market would just take a breather, considering it’s not going to be a good result,” said Leo Grohowski, CIO of BNY Mellon Wealth Management. “I’m glad to see the markets can distinguish between trade wars and trade talk. There’s trade drama, and there’s trade tension, but we don’t trade on drama and tensions.”

Stocks finished Friday higher, ending the first day of the two-day summit with the S&P 500 up 8 points to 2,779.

Trump went into the meeting sparring with French President Emmanuel Macron and Canadian Prime Minister Justin Trudeau, tweeting that they use tariffs and trade barriers. Macron had tweeted that the other six countries could sign an agreement without the U.S. Trump has said he plans to leave the meeting several hours early on Saturday morning, due to his summit with North Korea’s Kim Jong Un in Singapore Tuesday.

In a positive Friday afternoon, Trump in a joint appearance with Trudeau said they are working on cutting tariffs and are discussing NAFTA. However, Trump said one of the things he would like to discuss are separate deals with Canada and Mexico. Trudeau has previously said he would like the talks to remain trilateral.

From the meeting in Quebec, German Chancellor Angela Merkel said it’s unclear whether there would be a statement after the meeting as there normally is, but if there’s not, that would be an honest reflection of the differences. Merkel had gone into the meeting acknowledging it would be tough.

“In one sense, we’ve had G-7 statements for the last decade where everybody patted each other on the back, and they sign it, and nobody does anything,” said Robert Sinche, chief global analyst at Amherst Pierpont. “I think [Trump’s] clearly indicated this is not worth his time. He doesn’t expect anything to happen. He’s going to leave early. On one level, it’s insulting, but on another level, you say: ‘What relevant items have we gotten out of this since the ’90s?’ and you say: ‘Not much.'”

The Trump administration’s use of tariffs against allies has been criticized, including by some Republicans, as misdirected, when he should have been taking on China for its unfair practices. But his tactics are also seen as a process in negotiating better trade deals for the U.S. within the North American Free Trade Agreement and with other countries.

The posturing, however, at the leaders’ meeting could be important. “They do matter this time, in the context of other policies, and conflicts that are working out and in some ways being represented here,” said Bruce Kasman, chief global economist at J.P. Morgan.

“There is a risk that NAFTA could blow up. You could have a more contentious trade conflict here,” he added. “This is real, and it can’t be ignored. It has been part of what has held markets down in a world where we’re seeing some pretty good news coming out of the U.S. economy. It’s looking pretty good.”

Kasman said it’s hard to say what will happen to NAFTA now that a deal, which had been expected by now, does not look close. The Mexican election is July 1, and it’s unlikely there could be an agreement on revamping NAFTA by then. “The best outcome is this simmers for awhile and they come back to it,” he said.

Kasman said a big issue in trade comes up next week when the U.S. is expected to continue discussions with China, but also come up with a list of goods that could be subject to tariffs by Friday.

Any trade war would hurt the U.S. and the global economy. “It looks like Asia is lifting with the U.S., and we think China’s [data] will be constructive,” he said. But trade wars could hurt all economies, though possibly the U.S. less than some others.

“We could see the U.S. and the EU put tariffs on small items here and there. We could live with that, but the question of NAFTA blowing up is a serious, significant event,” he said. Mexico and Canada have balked at the U.S. demand for a sunset provision for NAFTA and other issues.

Also problematic would be if the tariff tit-for-tat escalates between the U.S. and Europe or other countries. “We’re not in a trade war right now, but the tensions that are being reflected at G-7 are indicative of the risks,” Kasman said.

The emerging markets have also been rattled by trade issues, and Kasman said some of the worsening in financial conditions in those markets is reflecting worries that trade wars will hit growth.

“It’s hard to know what the administration is trying to achieve here. If the administration is genuinely interested in maintaining trade relations, but it’s trying to leverage toward a better deal for markets, it would be important to get that signal out,” said Kasman. “Obviously, one of the problems you have right now is when you’re pricing in risk in the marketplace, you don’t know how far they’re willing to go, and to what degree they’re interested in altering global trade relations. That’s a feeling that’s going to linger here.”