Digest: June 2017

Trexit’s threat to trade… US economic nationalism is a danger to the rules-based system which has governed world trade and facilitated the expansion of the logistics and forwarding industries since the Second World War, writes Michael King.

The UK’s latest national election in June threw a spoke in the wheel marked ‘Brexit’. Prime Minister Theresa May had sought a clear electoral mandate for her vague version of ‘hard Brexit’, assumed by most to mean a scorched earth approach to withdrawal from the European Union. Instead she received a bloody nose from an electorate which failed to warm to her, or to the Conservative manifesto.

Those in the business of trade have warned repeatedly that a ‘hard’ withdrawal by the UK from the EU’s customs union and single market would be painful, particularly if the UK left without a trade deal with its largest trading partner and was forced to fall back on World Trade Organisation rules.

As Forwarder went to press, the political power of ideologically-driven Tory Eurosceptics was waning and Theresa May’s tenure as Prime Minister seemed certain to be coming to an end. A more consensual, less economically disastrous ‘soft Brexit’ strategy was being promoted by leaders from across the political spectrum. But none of this changed the fact that unless last year’s referendum result is somehow reversed, the UK’s eventual departure from the EU in 2019 will seriously disrupt European trade and send forth economic ripples worldwide.

Yet the impact of Brexit in a global context will be miniscule when compared to the prospect of a continued US pull-back from the post-World War 2 institutions it largely designed and which have enabled global trade to flourish in the decades since.

Brexit vs Trexit

Donald Trump has consistently said he will make US economic decisions as a businessman rather than as a politician. In Trump’s world, trade is a zero sum game which means the US should sell more than it buys, not run huge trade deficits. True to his word, on winning the Presidency he was quick to appoint a number of economic nationalists to his team.

Mexico, China and NAFTA were the expected trade targets of the Trump administration. Less than six months into the new Presidency, priorities appear to have changed although not the overall intent of policy.

Peter Navarro, Trump’s top trade advisor and a leading advocate of unwinding and repatriating the international supply chains on which many US multinational companies rely, instead took aim at Germany which he claimed managed the Euro in manner which exploited the US. The Trump government also confirmed that the proposed EU-US Transatlantic Trade and Investment Partnership (TTIP), already unpopular in Europe, was dead in the water. Thus far, Trump has appeared reluctant to fulfil campaign threats of a NAFTA withdrawal or the imposition of wholesale, 45 percent import tariffs on China. Instead a slew of investigations has been launched into specific trades such as steel and aluminium imports using previously unused trade barrier-erection tools. In some cases, the justification for import tariff increases is being made on national security grounds.

Such stealth protectionism could quickly lead to retaliation from trading partners. Less stealthy are the proposed border adjustment tax, a value-added tax levied on imported goods but not exports, and plans to build a wall on the Mexican border.

Trump’s trade-offs

Yet the most obvious expression of ‘Trumpian’ protectionist economics was the US withdrawal from the Trans-Pacific Partnership (TPP). As Tami Overby, U.S. Chamber of Commerce senior vice president for Asia, recently pointed out, pulling out of a deal which took years to negotiate was both bad for US business and national influence in Asia.

As Overby notes, trade within Asia is surging, yet following withdrawal from TPP the U.S. is party to only three Free Trade Agreements – with Australia, Singapore, and South Korea – in the APAC region. So while total Asian imports rose three-fold over the past 15 years, ‘the U.S. share of the pie has dropped dramatically, from 12.2% in 2000 to 6.6% in 2014’, said Overby.

What lessons the Trump government will draw from ‘losing’ in Asia remain to be seen given the President’s penchant for ‘winning’ at all costs. But what is clear is that a US withdrawal is creating a vacuum, and vacuums tend to be filled.

Vacuums & Losers

Japan and New Zealand, the only countries to have ratified TPP, are now pushing forward with a possible ‘TPP-11’ arrangement— i.e. one without the U.S. There have also been suggestions that China could replace the US in TPP.

Meanwhile, sixteen Asian economies – China, Japan, Korea, Australia, New Zealand, India, and the 10 ASEAN countries – are accelerating efforts to conclude negotiations on the Regional Comprehensive Economic Partnership (RCEP). Although RCEP is a less ambitious and lower-standard agreement than TPP, both a revised TPP and RCEP are possible pathways toward the longstanding APEC goal of a Free Trade Area of the Asia Pacific (FTAAP).  Efforts by China to expand its influence and trade network via RCEP in Asia and, in Eurasia and North Africa, via ‘One Belt, One Road’ (OBOR), are viewed by many as having political and military ramifications as well as purely trading objectives.

Economic nationalism: the dangers

The Trump administration’s actions have, so far at least, simply served to diminish US influence overseas and annoy shippers and forwarders, but they do shine a light on what a policy based on perceived trade winners and losers could lead to.

US trade deficits have long been a pillar of the current geopolitical and trading system which is powered by the ready availability of the greenback. Should the US continue its retreat from global trading structures and seek national advantage above all else then this system, which has supported global prosperity and stability for decades, could quickly begin to unravel.

The possibility of a global currency shortage turning markets illiquid might seem far-fetched, but multiple economists have already raised this as a serious possibility and predicted trade wars would quickly break out. And, much as it seeks to expand its global influence, China has so far given little indication that it would be willing to roll out the Renminbi as a replacement for the US dollar to ensure the liquidity of markets as the price of superpower status.

Resulting trade protectionist conflicts could quickly lead to the rise of regional trading blocs, more populist ‘mini-Trumps’ preaching economic nationalism, or even a return to something like the aggressive zero-sum mercantilism of the 19th Century. And it is worth remembering that the latter provoked the rapid of spread of colonization in search of captive markets, an upsurge in economic nationalism and a host of local and regional wars which finally led to World War 1. Nazism and WWII followed.

As Jack Ma, the founder of Alibaba, recently explained, the world needs globalization and trade because the alternatives are terrible. ‘Everybody is concerned about trade wars. If trade stops, war starts,’ he added.

‘Trexit’ has the potential to be far more damaging to world trade (and peace) than any form of Brexit.

Michael King, Contributing Editor,
FORWARDER magazine

2017-06-26T16:20:38+00:00 June 26th, 2017|Digest|