Trump turns the tables on trade

August 08, 2018 16:51
One of the reasons Donald Trump is focusing so intently on trade is that it appears to be a winning political issue at home. Photo: Reuters

As President Donald Trump ramps up the trade wars and retaliatory measures spread, investors are entering an unknown landscape – and no one knows what the US will do next. Yet given that trade makes up more than one-third of global GDP, it's critical to assess what we do and don’t know about how the status quo could change.

In his words and deeds, Trump has been busy transforming the terms and tone of global trade. While he has been careful not to flout WTO rules too flagrantly, he has used the issue of national security to target what he considers the unfair trade practices of others.

One of the reasons the US president is focusing so intently on trade is that it appears to be a winning political issue. Trade-related issues poll well and the November US mid-term elections are approaching, so we expect to see a steady flow of trade-related headlines. That said, one challenge for Trump is that he may not be able to show enough progress on trade in time for the 2020 elections, particularly given that it has taken decades to build the status quo.

When his administration renegotiates trade agreements, we expect them to be more often bilateral rather than multilateral. Trump believes that by keeping trade agreements between two countries, he can win the largest discounts and most favorable terms for the US.

He has also brought forth a new and rather extraordinary trade weapon: focusing on companies rather than just individuals or states. Given the potentially profound market implications, many corporations will be keen to avoid catching his attention.

What should investors watch out for?

1. Prepare for the end of NAFTA
Trump has been ramping up tensions with Mexico, and it is entirely possible that the US could pull out of the North American Free Trade Agreement, particularly given the United States’ push for new bilateral agreements that bring greater benefits to the US. An end to NAFTA would affect not just goods but services: financials, tech, banks and insurance companies could all be hurt.

2. Keep an eye on non-tariff barriers
While news headlines are all about tariffs, the US and many other countries use other, non-tariff trade barriers to control foreign competition. For example, "rules of origin" have become more elaborate to seek to address the effects of unfair trade competition. In fact, when subsidies and state aid are included alongside tax relief and industry bailouts over recent years, more than 55 percent of trade interventions are not tariff-related. Investors should focus on these more granular details, which will affect corporate prospects.

3. Watch for currency volatility
For decades, the US dollar has been the world’s reserve currency, but a growing number of countries have sought to diversify away from the dollar standard – and this may accelerate as trade wars evolve through retaliation. This process would create currency volatility in countries moving away from the dollar, and it would also pressure the US to fund its own deficits though higher savings and investments.

4. Mind the margins
Corporations around the world have been caught up in the trade-war maelstrom, and politics are winning over economic common sense. Margins could be affected as production is relocated away from the outsourcing partners that once made production cheaper and more efficient. Consider the global tech titans of the US: if they are no longer able to rely on labor and equipment from Asia, they may be forced to rebuild their manufacturing capabilities in the US or select from a dwindling list of allies.

5. Guard against complacency
For some time, US enthusiasm about Trump’s tax cuts and deregulatory efforts has made markets complacent. So while the markets are nervous of the changes in trade, they seem to be counting on common sense to prevail, which is making them relaxed about the eventual outcome. This is already undermining corporations and investment.

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As Global Strategist at Allianz Global Investors, Neil Dwane is responsible for presenting strategic house views and overseeing the Economics and Strategy Research teams.