The Daily Update - Trade and Trump

Whether the actual impact of a Trump Presidency on global trade will turn out to be as negative as the campaign’s protectionist rhetoric remains unclear save that even under a better case scenario Trump is clearly looking to renegotiate the status quo. While NAFTA (with Canada and Mexico) is one agreement that he has been particularly vitriolic about, describing it as ‘probably the worst trade deal ever agreed to’, any country running a large bilateral surplus with the US could well find themselves in the firing line.

The US Treasury already releases a Semi Annual Report to Congress on the Foreign Exchange Policies of Major Trading of the US as part of a view of the exchange rate and externally-oriented policies of its major trading partners. In the October report Germany, China, Japan, Korea, Taiwan and Switzerland are all on a monitoring list having at least 2 of the following 3 traits: a material bilateral trade surplus with the US, a material current account or exhibiting persistent one sided foreign-exchange intervention. That said, under that review period none of the named countries exhibited all 3 traits or were considered currency manipulators. Nevertheless, this list of countries may find themselves more heavily scrutinised under a Trump administration.

China’s trading relationship with the US seems an obvious target with the Trump campaign voicing concern about currency manipulation. That said, although the renminbi has weakened against the US dollar its depreciation has been less marked against a basket of trading partners’ currencies. The US Treasury Department Review also notes ‘China’s intervention in foreign exchange markets has sought to prevent a rapid RMB depreciation that would have negative consequences for the Chinese and global economies. Treasury estimates that from August 2015 through August 2016, China sold more than $570 billion in foreign currency assets to prevent more rapid RMB depreciation.’ While it is true that China’s current account surplus reached an excessive and unsustainable level of 10 percent of GDP in 2007 it has now adjusted back to a more reasonable level in the range of 1.9-2.7 percent for 2011-2015. But as China is one of the US’s largest trading partners, and they still run a sizeable current account surplus in absolute terms, it seems this administration is likely to at the very least push for further trade rebalancing with the Treasury report highlighting the need for reforms to boost China’s domestic consumption.

But we think Germany could also find itself criticised for running large surpluses: Germany ran a current account surplus of 9.4 percent of GDP in 1H’16 and a sizeable bilateral trade surplus with the US. The US Treasury notes: ‘This surplus represents substantial excess saving’ and that ‘Some of this saving could, at least in part, be used to support German domestic demand while also reducing the current account surplus and contributing markedly to euro area and global rebalancing.’

Trump has also announced his intention to withdraw from Trans Pacific Partnership (TPP), a proposed trade agreement, looking instead to ‘negotiate fair bilateral trade deals that bring jobs and industry back’. But as Olivier Blanchard, a Senior Fellow at the Peterson Institute for International Economics and the former Chief Economist at the IMF notes imposing tariffs risks decreasing growth and increasing the likelihood of a recession: ‘Tariffs by themselves may indeed reduce imports, increase the demand for domestic goods, and increase output (although, even then, as pointed out by Robert Mundell more than fifty years ago, the exchange rate may appreciate enough to lead to lower output in the end). But the "by themselves" assumption is just not right: Tariffs imposed by the United States would most likely lead to a tariff war and thus decrease exports. And the decrease in imports and exports would not be a wash. On the demand side, higher import prices would lead the Fed to increase interest rates further. On the supply side, and in my opinion more importantly, the tariffs would put into question global supply chains, disrupt production and trade, and decrease productivity.’

Interestingly, some of Trump’s key appointments have not all been hard-line protectionists: So how literally one should take some of Trump’s rhetoric remains unclear; after all he is author of the bestseller ‘The Art of the Deal’.