Global trade is thriving in spite of Donald Trump. One year into his presidency, we are still waiting to see the effects on trade. Finbarr Bermingham reports.
When Donald Trump assumed the US presidency in January 2017, global trade was facing down the barrel of a gun. The previous year, world trade growth had slipped back to financial crisis levels and few were predicting an improvement in 2017.
The two largest economies in the world were facing identity crises. China, the workshop of the world, was trying to rebrand itself as a consumption-led economy. Its leaders were regularly preaching the virtues of free and open markets, hardly the kind of rhetoric you expect from a communist state.
The US, on the other hand, was ready to turn its back on a century of globalisation. A protectionist was in the White House, with the Trump campaign successfully laying the blame for the US’ post-industrial malaise on the twin evils of open borders and open markets. He would, he assured everyone, launch an aggressive trade war on China, brand them a currency manipulator and “make America great again”.
One year on, we’re still waiting to see the impact of Trump’s policies on global trade. In fact, few of his policies have been passed. His first year in office has been defined by calamitous efforts to get major domestic reform over the line. The scandals that have engulfed his administration disguise what has been a largely underwhelming year in office in policy terms, albeit one in which Trump has remained firmly on the campaign trail, appealing to his base rather than the country.
“Incredibly his rhetoric has remained the same: strong anti-trade rhetoric. Campaign talk is one thing but once you become the president your constituency broadens. But his has not, he is in constant campaign-mode and thinks that those who didn’t vote for him are not his constituents. It’s odd, but he’s clearly still focusing on his base, with complete disregard for others. This is very different from any previous presidency in my lifetime,” says Stephen Kho, international trade partner at Akin Gump.
On the trade front, one of Trump’s first actions was to withdraw the US from the Trans-Pacific Partnership (TPP), an ominous harbinger for the pro-trade camp. He then set about trying to renegotiate the North Atlantic Free Trade Agreement (Nafta), ruffling plenty of feathers along the way, but making little progress. He appointed Robert Lighthizer, a protectionist, as his US trade representative (USTR) and attack dog in chief. All the signs pointed to a US retreat.
And yet, global trade is booming. In the closing weeks of 2017, the IMF predicted that trade had expanded by 4.2%, up from 1.6% the previous year. This marked the first time that global trade growth outpaced that of GDP since 2014, a turnaround few expected at the beginning of the year. In October, meanwhile, the US trade deficit widened by 8.6%, spurred by record imports, despite the fact that Trump had vowed to redress the trade balance.
In spite of Trump
Carlos Casanova, an economist at Coface, says there are three drivers behind the recovery in global trade – and none of them are Donald Trump. He highlights recovery in business conditions in developed markets (including the US, but only mildly aligned to Trump’s policies), the uptick in commodity prices and strong trade in electronics as the primary reasons.
“The US economy is at full employment, while the Fed has been slow to remove policy accommodation. Trump’s fiscal policies might help to delay the downturn in the current business cycle, albeit not for very long time, as obstacles remain on the implementation front,” Casanova tells GTR.
Stronger trade generally translates as better trade finance markets and speaking to practitioners around the world, this was the case in 2017. As trade volumes have improved so has the deal flow. Although many markets are flush with liquidity, putting a squeeze on pricing, the picture is much healthier than 2015 and 2016.
“In 2017 our industry has collectively gotten better,” says Chris Lewis, global head of trade services at Wells Fargo. “When I talk to my peers, they say it’s better than it has been for a couple of years. Generally people are more positive about the whole thing. A part of that is because the world has settled down a little more. Activity in China, the biggest trading country in the world, has picked up. Commodity prices have more or less stabilised, the oil price has gone up. That’s helped things, the value of shipments.”
JP Jolly, global head of financing and channels at Bank of America Merrill Lynch, tells GTR that the bank’s trade book was up 10% last year and while fears over protectionism are yet to be fully realised, he says that rising Federal interest rates have helped boost supply chain finance.
It stands to reason that in a low interest rate environment, working capital management requires less discipline. But as interest rates creep up, pennies need to be watched – accruing debt can be costly. “More corporates want to do supply chain finance. They are expecting the US interest rates to rise and there’s more and more understanding that you can extend days payable outstanding (DPOs),” Jolly says.
Talk is cheap
Once again, the Fed hike was planned and anticipated long before Trump entered office, begging the question: what has he actually done? Focusing exclusively on trade, so far the shift has been attitudinal rather than material. Exiting TPP was a huge signal to the world, but in reality the US was withdrawing from an agreement which had yet to come into force. The impact on the US or elsewhere, therefore, was wholly notional.
“A general TPP is good in the sense of it is a freer trading market. What they’re trying to do with TPP-11, it means you go ahead without the US and allow it to come in post-Trump. For Australia it’s not such a big deal, because for most of our Asian trading partners we have free trade agreements. So all you’re doing is opening other people up to the same advantage, the net effect is not much,” says Alan Oster, chief economist at National Australia Bank.
But as the remaining TPP countries move closer to an agreement, the US is more determined to shore up its own interests and watch from the sidelines. This is indicative of the US’ wider strategy and how it is being perceived overseas: it is rejecting multilateralism for bilateralism or even unilateralism.
It can be seen in the efforts to renegotiate Nafta on more favourable terms to the US (Canadian and Mexican officials have threatened to walk due to the unrealistic demands being made by US negotiators). On a trip to Asia in November, Trump’s entourage attempted to kickstart talks on bilateral agreements with the likes of Japan, South Korea and the Philippines, but made little headway.
“Trump has made it clear that he’s keen on doing bilateral deals. So far there’s not been much action on trade or anything else but this was the chance to start talking with individual countries, because that’s his preferred modality going forward, not these mega-regional deals. He thinks the US interests can be better advanced in a bilateral context than multilateral,” Jay Menon, lead economist at the Asian Development Bank, tells GTR.
On returning from Asia, the Trump administration released congratulatory press releases about the number of government-to-government deals that were signed and various memoranda on energy exports. But these masked what must have been frustration at not securing more. The Asian countries Trump visited did not bite on bilaterals and the export deals that were inked were mainly for the export of raw materials. Chinese President Xi Jinping was happy to agree to import more US beef, cotton, LNG and crude oil, but nothing on manufacturing.
“So what is he saying? We want your raw materials, your energy, your agri products, some of your services. There’s not much mention of high-tech manufacturing, to the extent that that’s what you want to trade with China, they want to take that space for themselves,” says Timothy Stratford, managing partner at Covington & Burling’s Beijing office and former assistant USTR.
“The US feels it shouldn’t be excluded from the industrial sector. The next thing you’ll see is the US is going to have closer scrutiny of Chinese investment in the US, to see if it’s state supported on terms that aren’t necessarily competitive.”
The envisaged trade war between the world’s two largest economies has yet to materialise. Trump supporters may have been surprised to hear him heap lavish praise on a Chinese government he has previously railed against, during his trip to Beijing.
“Right now, unfortunately, it is a very one-sided and unfair [relationship]. But I don’t blame China. After all, who can blame a country for taking advantage of another country for the benefit of its own citizens? I give China great credit,” he said.
But as Stratford intimates, this has the potential to escalate quickly, particularly with Lighthizer as USTR. In November, the US formally told the WTO that it opposed granting China market economy status. The opposition means the US can continue to impose high anti-dumping duties on China. The US, along with the EU, says China’s state subsidies mean it is not a market-based economy. Lighthizer said that granting it this status would lead to floods of cheap Chinese goods and described this as “the most serious litigation we have at the WTO right now”.
Days before this, the US launched an anti-dumping case against Chinese aluminium producers, using unilateral tools that pre-date the WTO and which have not been used for decades. These actions fly in the face of WTO structures the US was instrumental in establishing.
“If the US is interested and serious about enforcement, you need the global system. Unilateral enforcement mechanisms don’t work anymore because the US is not the only game in town. The perception that countries will do whatever it takes to trade with the US is a miscalculation by some officials,” says Kho at Akin Gump.
Perhaps this is one of the notable, if intangible, effects on trade of Trump’s presidency so far: the changed perception of the US overseas. It can no longer be relied upon as a bastion of free trade, nor can it be trusted to act according to international standards on foreign policy and diplomacy. Trump has withdrawn from the TPP, the Paris Agreement, Unesco, the UN Declaration for Refugees and Migrants, as well as reversing bans on trophy hunting and ivory imports. There’s even talk of unilaterally withdrawing from the WTO.
This perception affects confidence in the US economy, but also US exporters’ decisions on whether to launch new projects or products, while other countries are moving on without the US. In Hong Kong recently, senior staffers from companies such as BASF and DHL spoke of the lingering fear among exporters. Trump may not have passed much binding legislation affecting exporters yet, but his volatility remains a huge concern.
“The danger of this is that if he does do something that damages the US standing with the WTO for example, maybe you end up with a Brexit-type situation, people saying: ‘I guess the US doesn’t want to do trade anymore, we’ll take a hard line with them.’ That could cause problems for exporters. I don’t think people are thinking that far ahead, but they need to be. Business is picking up now, but watch out for further down the line,” says Lewis at Wells Fargo.
From climate change sceptic Scott Pruitt being placed in charge of the Environmental Protection Agency, to Rick Perry heading the department of energy, Trump has made a habit of appointing people to run agencies they previously tried to take down. Installing Lighthizer as USTR sent a message that the previously outward-looking US trade function would become more hawkish. Trump’s approach to the Export-Import Bank of the United States (US Exim) has been equally contradictory.
In nominating former New Jersey congressman Scott Garrett to run the US’ export credit agency, he has chosen one of its fiercest critics. Garrett previously described it as “a bank that embodies the corruption of the free enterprise system” and “taxpayer-funded welfare for mega-corporations” (this mirrors Trump’s campaign rhetoric on US Exim, but he vowed to keep it open once he gained office).
Ohio senator Sherrod Brown described Garrett’s nomination as “putting an arsonist in charge of the fire department”, while former US Exim chairman Fred Hochberg has called it “very troubling”. There has also been forceful opposition from US industry.
“Scott Garrett has a long and disgraceful record of trying to kill US Exim, while showing no concern for the 1.4 million American jobs it supports. Letting him lead the bank is simply too big a risk for America’s manufacturing workers,” says Jay Timmons, CEO of the National Association of Manufacturers.
Senior executive vice-president of the US chamber of commerce, Suzanne Clark, adds: “Since President Trump announced his intent to nominate Mr Garrett on April 14, 2017, Mr Garrett has failed to in any way publicly describe any change of heart towards Exim to explain why he now wants to lead the organisation that he spent so much of his career trying to shutter, nor has he committed to returning Exim to a fully functional state.”
It begs the question: in whose interest is Trump working?
“In industry, it’s often a big surprise that this administration, despite saying the US is losing and other countries are winning, doesn’t take industry concerns into account. It’s not clear what the end game is, if it’s not to help US industry and companies. What is the reason for what they’re doing?” asks Kho.
In the case of Perry and Pruitt, it is easy to trace their actions back to the fossil fuel industry that has funded their campaigning for years. For Trump, the line is less apparent. In March, influential former advisor and Breitbart News editor Steve Bannon described Trump’s cabinet appointments as “the deconstruction of the administrative state”. Many have speculated as to why a US president might want to take down the system from the inside, but there are no clear answers as yet.
As it stands, these disruptive appointments and the failure of Trump to fill important diplomatic roles abroad may pose a greater threat to US trade than any concrete policy actions he has taken to date (as the prospect of war in the Korean peninsula grows greater, there is no US ambassador to represent the White House in Seoul).
And so we enter 2018 surrounded in as much uncertainty as before. Trump’s inaction combined with his volatility creates nerves among the trade sector. But as the global trade figures show, the US retreat does not mean the world stops spinning.
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