While journalists have spilled gallons of ink on the “Trump Effect”, has global trade fundamentally changed since Donald Trump became U.S. President on January 20, 2017?
On the surface, international trade operations do not look substantially different today than they did a year ago. Container ships still ply the waters around the globe. Thousands of international express shipments still pass daily through UPS Worldport and competitor facilities. Warehouse space in the U.S. is still very much in demand.
The question of trade policy is another matter entirely. The shift from Obama to Trump has marked a radical shift. Mr. Trump has pulled the U.S. out of the Trans-Pacific Partnership. He has effectively killed the T-TIP negotiations with Europe. The United States is also re-negotiating the North American Free Trade Agreement (NAFTA) – a 25-year-old pact that the President has repeatedly called a “disaster”. There has been vague talk of a US-UK trade agreement, but that is years away. Meanwhile, the WTO process remains largely moribund.
Yet, if one looks closely, it is not only the policy side of commerce that is changing. International trade operations, like much else, are being buffeted by accelerating technology and industry consolidation. This article will assess what global trade in the age of Trump will look like and how market participants should re-imagine their strategies.
The call of “America First” has echoed across the world since Donald Trump came to the White House. While his advisors have gone to great lengths to argue that this mantra does not mean “America Alone”, there are now widespread doubts about the commitment of the United States to lead internationally.
The Trump Administration has proposed significantly scaling back resources for diplomacy, trade development and foreign assistance while ramping up defence spending. Although Congress has raised significant concerns about the retrenchment of non-defence foreign affairs resources, the Trump budget has sent a clear signal internationally about what the Administration values.
Even on the military side, U.S. allies in East Asia now harbour doubts over the extent of America’s willingness to check Beijing’s ambitions to call the shots in the South China Sea. A diminishment of the U.S. Navy’s role in guaranteeing freedom of navigation would be a game-changer for global trade.
The proposed Trump retrenchment also is extending to the question of “values”. Media reports suggest that the State Department may drop “democracy promotion” from its list of core mission priorities. As many a commentator has pointed out, political freedom and economic freedom, including the concept of free trade, are inter-linked. The U.S. retreat as leader of the “free world” is coming at a challenging time. Financial Times commentator Edward Luce points out that roughly two-dozen democracies have basically failed since 2000. With democratic retrenchment comes growing populism and a corresponding scepticism of trade and markets.
Even in jurisdictions such as France and Canada in which leaders are not intent on tearing up trade deals, they do want them to become more “progressive”. While there is no agreed definition of what that means, additional social or compliance obligations could make trade more expensive and complicated.
In less than two decades the world has gone from the “inevitable” march of globalization to its rejection.
As Craig Barrett, the former CEO of Intel observed: “You don’t bring three billion people into the world economy overnight without huge consequences.”
Manufacturing industries from Bangladesh to Australia are facing extreme pressure from Chinese competition while white-collar workers from throughout the OECD fear the outsourcing of services jobs to India. Just over the horizon, workers everywhere look warily at the accelerating pace of automation.
Radical shifts have political consequences. In the hyper-connected world created by globalization, there is a certain weariness of change and wariness of further openness, economic and otherwise.
In the years, one should expect fewer trade agreements, even as the pace of technological change accelerates. Politicians, who are elected nationally, are likely to embrace greater efforts to localize production, support “strategic industries” and take punitive actions against “unfair” trade.
For companies, traceability will become critical. This will stem not only from increased compliance obligations, but a need to avoid being embroiled in trade frictions. Put another way, it will increasingly matter where one produces and where one sells. The idea of producing in one or two locations for the whole world will become increasingly untenable.
Since 2000, the OECD countries have gone from accounting for 60% of global GDP to under 50% today. The GDP of the United States has gone from being 8.5 times larger than China to a mere 1.4 times larger today. This shift has created hundreds of millions of new middle class consumers.
China has become a formidable competitor, principally playing by its own rules. The WTO system has delivered significant market access to China across the globe, but has not forced it to open its domestic market. As a consequence, President Xi travelled to the 2017 Davos concave to claim that China is now the champion of global free trade, which they define as the retention of the status quo.
Like many rising powers in history, China is basically mercantilist. It wants free access to the markets of others while basically protecting its home market. Over the last two-decades, China has basically pushed large numbers of foreign companies into joint ventures with local firms. According to EU Chamber of Commerce in China, its “Made in China 2025” is a “large-scale import substitution plan aimed at nationalizing key industries.”
Without a doubt, China is reshaping the economic geography of the world. Its supply chains link to every corner of the world. It is home to the world’s largest auto market. Its national champions such as Huawei have their equipment installed in networks around the world. It moves commodity markets.
China’s “Belt and Road” initiative seems set to yield the largest investment in trade infrastructure in decades. These projects will, of course, be built with Chinese industrial outputs, including steel, thereby reducing pressure for consolidation in its domestic industries.
China has already created new trade linkages with countries that the west has effectively ignored for years. While often wary of China, leaders in many countries on Beijing’s charm list receive no serious counter-overtures from the west. The proposed cuts by the Trump Administration to the U.S. foreign assistance and diplomatic budgets would seem likely to only exacerbate this situation.
While global trade flows have never fully recovered from the 2008 financial crisis, the global shipping industry has continued to add significant new capacity. The chaotic bankruptcy of South Korea’s Hanjin Shipping Company seems to only be the tip of the iceburg for the industry. Freight rates are at near record lows and the steady emergence of Ultra Large Container Ships is only feeding this over capacity crisis. The acceleration of mergers that will address the over-capacity challenge and stabilize freight rates seems inevitable over the medium term.
E-Commerce is expected to continue to grow exponentially. Importantly, this commercial revolution is moving far beyond established markets. For example, a large e-commerce site in Sri Lanka maintains two U.S. warehouses. Why? They essentially use the Amazon network to offer their customers maximum variety cheaper prices. Products are shipped to their U.S. facilities, consolidated, and shipped to Sri Lanka at scale. The company even distributes these goods to their customers through a hyper-local “last mile” network. In short, a growing middle class in Sri Lanka is creating employment in America by buying products originally manufactured in China. Strange world.
President Trump is proposing to change policies around international trade, but the flows of goods and services seem set, for now, to persist. Trade fundamentally is rooted in economics and global comparative advantages necessitate commerce among nations. Yet, the policy environment does matter. It is important that Mr. Trump did not propose imposing new tariffs and quotas in the re-made NAFTA. It matters that Congress is scaling back the Trump proposal for U.S. global retrenchment. For now, it appears that the “age of Trump” may matter comparatively little for global trade over the long-term as compared to consolidation and new business models. This can only be confirmed, however, when a U.S. and China showdown actually occurs. How this goes is anybody’s guess.
Eric Miller is President of Rideau Potomac Strategy Group and a Fellow at the Woodrow Wilson Center, the Canadian Global Affairs Institute and the Stimson Center.