We need to keep in mind that trade takes place under WTO rules. China is the U.S.’s biggest trading partner, despite no free trade agreement being in place. Of course, if Trump were to pull out of the WTO, then that would be a game changer. But, globalisation, especially e-commerce and the Internet linking markets and people, will mean that trade is likely to continue across borders as it’s hard to see a significant roll-back Costs of trade, of course, are another issue to be focused on.
Luckily, the Trump administration hasn’t honed in on e-commerce, which is good news for procurement and supply chains. Currently, one in ten transactions are already undertaken via e-commerce, and this figure will continue to grow. Trump may have moved quickly to sign the TPP withdrawal order on his first day in office, but that wasn’t a formal agreement. Extricating the United States from NAFTA for instance will require renegotiation time and then a period of notice before that free trade agreement would end. Even then, most trade agreements include implementation periods, so a “cliff edge” is unlikely which gives businesses time to plan. Therefore, there’s no need to panic or overhaul your supply chain immediately. But, of course, forward planning and following economic policies would be wise. Also, take Brexit as an example – if Britain succeeds in triggering Article 50 in March 2017, then the UK is scheduled to leave the EU by the end of March 2019 – almost three full years after the people’s vote. And even there, the Prime Minister has indicated that there may be an implementation period to allow more time for businesses to adjust to leaving the Single Market. Things to watch 1) U.S. border taxes – recently, Trump threatened BMW with a 35 per cent border tax on foreign-built cars imported to the U.S. market. This isn’t an isolated incident and American companies are under even more pressure to produce in the U.S.. Congress is also considering a similar tax, so that is worth bearing in mind as that would have the force of legislation. 2) U.K. Tariffs – one of the consequences of a “hard” Brexit where the UK leaves the EU without any preferential trade deal, which would include no agreement on the Single Market, Customs Union, is the re-emergence of customs for EU trade. Right now, significant customs procedures only apply to non-EU shipments. But, with around half of UK exports going to the EU, taking leave of Britain’s membership in the EU with no deal would means the end of free movement of goods. More customs declarations and duties would raise costs, slow down supply chains and certainly add time at border checks. A potential ‘hard border’ would be a particular issue for Ireland. 3) Resourcing Brexit – the UK Government also needs to think about the resourcing challenges involved in ramping up staff as well as IT systems to cope with the doubling of customs checks on the UK border. 4) NAFTA – As mentioned earlier, Trump has also flagged that the North American Free Trade Agreement (between Canada, Mexico and the U.S.) is up for renegotiation. If you’re a U.S. company, you need to start making plans now about how these changes will affect you. The same applies to any other of America’s free trade deals with 20 countries that Trump would have the authority to re-examine. 5) China? – Globalisation has helped China become a manufacturing powerhouse, but with numerous closed markets.However, there are very good reasons to continue to do business with China. Wages may be rising but that helps businesses to think about China as a market as well as one production locale in a supply chain. Plus, with growing protectionism in America, China’s President has signalled that China may take more of a lead in globalisation. There’s a lot to watch for. What are the strategic implications of President-elect Donald Trump’s decision to withdraw the U.S. from the Trans-Pacific Partnership (TPP)?
It would be the reverse of President Barack Obama's rationale for pursuing the TPP as part of his Asia Pivot, which is his wider foreign policy aim to re-orient America toward the fast growing economies in the region. President Obama pushed the TPP as a way of securing American influence in Asia and as a counter-weight to China, which was not part of the TPP. As President-elect Trump has now indicated that he will withdraw from the TPP on his first day in office, it opens up space for China to take the lead in establishing a free trade area in the Asia Pacific and increase its influence, both economic and geopolitical, in the region. Of course, much depends on what President-elect Trump chooses to do in Asia, as he is not indicating that he is withdrawing from the region – just from this free trade agreement. Explain the potential impact of the Regional Comprehensive Economic Partnership (RCEP) and Free Trade Area of the Asia Pacific (FTAAP). These China-led regional free trade agreements have the potential of cementing China's influence in the wider Asia Pacific region, including the nations of the Pacific Rim and Latin America. As a middle income country, as compared with the U.S. which is a rich nation, China's aims and goals will be different and geared more at opening up markets for technology, services, and high-end manufacturing. This may well benefit other emerging markets, and there has already been interest from countries like Peru in joining a FTAAP. As the "hub" of a free trade area, China would be strongly positioned to set the terms of trade negotiations. Indeed, it would replace America which had been behind not just the TPP but also a free trade agreement with the European Union known as Transatlantic Trade and Investment Partnership (TTIP) which also looks uncertain. With the U.S. presidential transition underway, identify three indicators of what a Trump trade policy approach might look like. President-elect Trump has said repeatedly that he will put "America First." It appears he is concerned about American jobs and also wages. Of course, there are a lot of reasons as to why median wages have been stagnant in the U.S. for decades, which include trade as one cause. Trade always entails "winners and losers" and those who have been left behind in this era of globalization are calling for reforms. When America trades with a poorer nation, there is more of a negative impact on wages in the traded sector. Manufacturing jobs come to mind, for instance. There are ways to address the distributional impact of trade, but those thus far have not been entirely satisfactory. So, Trump's trade policy may focus on pushing trade with comparably wealthy nations where there is less of a wage differential. For instance, during the campaign, Canada was less of an issue than Mexico in NAFTA [North America Free Trade Agreement]. Secondly, Trump is likely to use trade negotiations to address these distributional concerns, which is arguably better done through domestic fiscal policy. Third, Trump has more authority as President to withdraw or re-negotiate trade deals and impose tariffs than enter into new ones which requires Congressional approval. And he seems more focused on withdrawing than entering into new ones, so that may well be the priority in his trade policy. How might President Xi Jinping and President-elect Trump build a pragmatic and productive relationship? As the leaders of two economic superpowers, they surely must find a way. China has always been pragmatic in its economic reforms. Appealing to businessman President-elect Trump may go some way toward speaking a common language about how to build a working relationship between two major economies which need each other's markets to grow. Specifically, it is in no country's interest to end up in a trade war. That's damaging for not only the countries involved but also the rest of the world which looks to the U.S. and China as the engines of global economic growth. And in numerous respects, the Chinese currency which had been a sore point for many years is no longer as under-valued as before, for instance, as China becomes more consumption-oriented and a middle-income country. Of course, there are other flash points such as over-capacity in Chinese industry in sectors like steel which are exported overseas. It's certainly in the interest of both nations to try to resolve differences short of tit-for-tat trade measures. Identify three Asia-related economic and trade consequential challenges facing the Trump administration. The Trump administration needs to determine where Asia sits in its priorities. The U.S. has historically close ties with Japan, for instance, which go beyond economic interests. But, the U.S. also has a number of foreign policy challenges in other parts of the world, so where does Asia fit in? President Obama's Asia Pivot is most unlikely to be the way forward, so what is the new agenda? Second, does the U.S. wish to pursue trade agreements, including with nations in Asia as a collective? With global trade liberalization moving very slowing on a multilateral basis, other nations are pursuing regional trade deals. For instance, the ASEAN Economic Community (AEC) linking 10 Southeast Asian nations is a single market with a similar population to the European Union has just been established. Is Trump interested in a FTA on a regional basis with the AEC or just bilateral trade deals? Bilateral FTAs are of course also being pursued around the world, but those take time just like larger deals and also don't usually deliver the access to a huge market like the AEC or the EU, for instance. Third, given the focus on the impact on American wages and jobs, how interested is the Trump administration in negotiating trade deals with Asia which consists of a number of poor and still emerging nations? Will American attention shift more to the advanced nations in the region, such as Japan, Korea, and Australia? What about emerging markets like India? Since trade is increasingly via American companies establishing production and supply chains across borders, there may well be an impact on the competitiveness of U.S. multinationals who often locate low-end production in developing nations, including in Asia which dominates consumer goods production. Trumpism is defined as: (1) the rejection of the current political establishment and the vigorous pursuit of American national interests; (2) a controversial or outrageous statement attributed to Donald Trump.
On winning the US Presidential election, Trump’s victory speech confirmed that he would put America first in his policies. That pursuit of America’s interests will permeate US economic and other policies in the years to come. US President Donald Trump’s effect on the economy is hard to discern due to a lack of policy detail, but there are three main areas to watch: fiscal, monetary, and foreign including trade policy. In each area, there is potential for significant change. But, as with all public policies, there will be a trade-off that is yet to be dissected. For instance, he’s vowed to double America’s growth rate, critiqued the Fed, and expressed protectionist views. How will he achieve those aims? And at what cost? Firstly, America’s economic growth has been slower than before the 2008 financial crisis. There are underlying trends that have led economists to debate whether the US, and other advanced economies, are facing “secular stagnation”. It’s a term first coined by Alvin Hansen in the 1930’s and recently revived by Larry Summers, which captures the notion that America may face a slower growth future. Trumpism’s first aim will be to raise economic growth, and the policy to be deployed to achieve that goal is to cut taxes and reduce regulation. But would that square with his desire to reduce America’s debt? The independent Tax Policy Centre, jointly set up by the Brookings Institution and the Urban Institute, estimates Trump’s plan will double the growth in federal debt. Will Trump be able to justify that trade-off in his fiscal policy? Of course, his plan to cut business taxes from 35% (which is among the highest in the OECD) to 15% (which would be among the lowest), as well as incentives to increase investment, may be welcomed by businesses who voted him into office. The Tax Policy Centre also concludes that Trump’s plan would actually increase and not decrease the tax burden on middle class Americans, while cutting taxes for the better-off and corporations. Given the stagnant median wages that have squeezed the middle class, economic growth that does not raise incomes for the average American is less than desirable. The American consumer also drives the global economy, so there are wider implications. Second, and perhaps one that’s important for markets is what happens to the Fed. Trump has criticised the Chair of the US central bank, Janet Yellen, for acting in a politicised manner. It has led to concerns over the independence of the Federal Reserve as well as whether Yellen will remain in post until February 2018. That adds prolonged uncertainty on top of the near-term economic uncertainty caused by the scant details of Trump’s economic plans. The dramatic market movements where the US benchmark stock index, S&P futures, fell so far it hit its bottom limit, as well as the plunge in the value of the dollar reflected the concerns of investors. Indeed, markets have downgraded the prospect of an interest rate rise next month to 50-50. But the most significant market movements were seen in emerging markets; notably Asian stock markets and the Mexican peso gave an indication as to how emerging economy currencies were unsettled by Trump’s foreign and particularly trade policy. Trump has said that he will revisit trade policy, including withdrawing from NAFTA if the agreement doesn’t benefit America, consistent with his philosophy of putting America first. This is an area where the President has the unilateral power to re-negotiate and even withdraw from trade agreements – congressional approval is needed to enter into free trade agreements (FTAs), but is not required to pull out. The same goes for the imposition of some tariffs, which President George W. Bush did on steel, until he was pulled back by the World Trade Organisation. In a world economy that it already experiencing weak trade growth, a more protectionist US president is certainly worrying for the rest of the world, many of whom rely on selling to the vast American market. For Asian economies in particular, growth depends a great deal on exports, including to the US. The immediate reaction to Trump’s surprise victory – polls predicted a Hillary Clinton win when the voting began – was a dramatic fall in global markets, which reflected this surprise but also an underlying concern about where America is headed. Those market declines were moderated as the news sank in. But what happens next will depend on the policy specifics around Trumpism. Until we get more detail, there will be economic uncertainty about America, and by extension, the global economy. And that tends to be unsettling. |