Trump's protectionism will hit America hardest
China is probably the most resilient of the unpredictable US president's targets
HENNY SENDER, Nikkei Asian Review columnist
There has been a wave of research in recent days from Wall Street investment banks and law firms speculating on the shape of protectionist measures the administration of U.S. President Donald Trump may adopt, along with attempts to identify potential beneficiaries (such as General Electric) and victims (the overwhelming consensus is that the biggest loser will be Walmart, the discount retail chain).
Many of the most well-connected Wall Street executives say there is a greater than 50% probability that Trump will impose higher tariffs and a border adjustment tax, aimed at discouraging imports from overseas factories owned by U.S. companies. Yet emerging markets assets have registered a decent start to the year, outperforming most other asset classes, according to research from Bank of America Merrill Lynch.
At the same time, there is evidence of faltering in the so-called Trump trade, in which investors assume that looser fiscal policy, deregulation and trade protectionism will drive up U.S. share prices and the dollar exchange rate while raising U.S. interest rates and depressing emerging markets equities.
In part, the revival of investors' faith in emerging markets reflects the improving fortunes of commodities producers, relative to those markets that are more tied into global manufacturing chains. But that is not the whole story; there is still a disconnect that is hard to fathom.
The markets seem to be pricing in a remarkably low probability that the U.S., once the biggest advocate of open markets and globalization, will repudiate such policies, despite many indications to the contrary -- both from the Trump White House and Congress, which is controlled by the Trump's Republican Party.
If trade is to be regarded as a zero sum game, in which one country's gains are another's losses, the impact on emerging Asia and American multinationals, which base a big part of their supply chains on the factories of the region, will be particularly dramatic. Emerging Asia has been the biggest beneficiary of the global supply chains that have fueled trade in manufactured goods, but it will suffer heavily if White House pressure on multinationals forces them to return overseas production to the U.S.
The measures being considered would discourage investment abroad in favor of investing at home. The Border Adjustment Tax does this by allowing full deductibility of expenses or the costs of goods sold only if they occurred in the U.S. But the Trump protectionist stance is not a break with recent U.S. history, it is the culmination of a long period in which America has been falling out of love with international trade.
Under President Barack Obama, the U.S. waged an increasingly hostile trade war against China. Between 2011 and 2015, the U.S. adopted 29 antidumping actions, went through the World Trade Organization dispute settlement process 21 times and filed 69 intellectual property rights infringement cases against China, according to BAML.
China, which accounts for over 50% of the total trade deficit of the U.S. ($347 billion in 2016, with Japan second at $69 billion) also appears to be most at risk of any protectionist or retaliatory measures by Trump. That is "partly because it is the last stop on the cross-border production network," the analysts at BAML point out, adding that China runs a trade deficit with many of its neighbors, such as South Korea.
But this conventional wisdom is wrong. China is probably far more resilient than any other target of the unpredictable Trump -- certainly more so than Mexico and Canada, where many U.S.-owned manufacturing plants are located. China's income levels and domestic market are growing, while its dependence on exports is falling.
Furthermore, Trump's rhetoric as he attacks or abandons agreements such as the Trans-Pacific Partnership and the North American Free Trade Agreement will drive both these neighbors of the U.S. closer to China. It is worth noting that for most of the original signatories of the TPP, China is already a bigger trading partner than is the U.S.
It is also worth noting that China is already increasing its international footprint. For example, the Asian Infrastructure Investment Bank, a Chinese-sponsored institution, will shortly add 25 new members -- of which Canada is one. The AIIB now has more members than the Asian Development Bank, the half-century old development bank dominated by Japan and the U.S.
Moreover, there is good reason to believe that the U.S. will be the biggest victim of its own protectionist policies. For one thing, American companies in China almost quadrupled the profits they reported to the U.S. tax authorities in the years from 2004 to 2012, JPMorgan economists note. Protectionist measures from the U.S. will almost certainly provoke retaliation, hurting American businesses operating on the mainland.
Many U.S. corporations use extensive global supply chains for vital production inputs. Border levies and tariffs could raise their costs of production in the U.S., increasing prices for American consumers and damaging U.S. export competitiveness. Others will suffer because they manufacture for global markets largely outside the U.S., focusing at home on high-value activities such as design and marketing. Apple, for example, relies heavily on Asian-made components for the phones that bear its name.
And while some analysts believe that China would be acting against its own economic interests if it began large-scale sales of its holdings of U.S. Treasuries, it was not a purely economic buyer in the first place. In recent months, it has begun selling its holdings as part of its efforts to resist a further weakening of its currency. If it wants to make a political point, it will not hesitate to accelerate the pace of its sales.
Protectionist policies designed to protect American workers will not work, because globalization is not the principal reason for job losses in the U.S. -- technology is. Today, American carmakers are disavowing new plants in Mexico in favor of re-shoring back home. But many of the new plants will close anyhow, within a decade, as the sharing economy and technology reshape demand.
Trump's vision seems to be a return to the 1950s, when the U.S. churned out white goods, cars and furniture. But future prosperity surely lies in moving forward to higher technology, more value-added goods and services, not in trying to return to an imagined golden past.