We believe that increasing discontent among the middle class of developed markets over the impact of globalization on muted wage growth has been one of the main themes of 2016 and has been one of the key drivers of Brexit and Trump’s election. And while we recognize that President Trump will have to address many of these trade liberalization concerns, we do not think he or the US policy makers will pass any dramatic trade policies given the significant trade reliance that the US has on Asia. In our opinion however, milder forms of trade protectionism policies are likely to be implemented and the potential impact on Asia, US’ biggest trading partner, could be substantial.
Trump unlikely to enact dramatic, overtly protectionist trade policies
While Trump has employed colourful and impassioned language around trade policy, we believe the actual implementation will be much milder than his rhetoric. Firstly, it will be difficult to substitute Asia’s strong value chain, infrastructure and ecosystem built over the past decades. It will likely take years to rebuild manufacturing in US to meet its own demand. Decades long of reduction in the US manufacturing sector has resulted in a decline of skillset, along with a decrease in the size of the manufacturing sector to ~10% of total private sector jobs today from ~17% twenty years ago.* Therefore, we believe it will be neither a quick nor easy task to ramp up existing factories, build new ones, and attract workers back to manufacturing. Furthermore, bringing back production onshore will likely increase the price of products and come at a cost to the US consumers. The question is whether said costs will be compensated by higher wages and economic growth. Lastly, broad business opposition in the form of lobbying and World Trade Organization trade law violation concerns will certainly post formidable resistance in keeping any overtly protectionist policies in check.
However, we do think various forms of milder trade protectionism policies will be implemented
At the heart of President Trump’s view is that trade policy is a lever to support export growth, job creation, and ultimately economic growth, therefore, it is likely that some form of trade protectionist policy will be implemented. Take for example the border tax adjustment, one of the proposed policies, which is much less abrasive and much more realistic than his now infamous rhetoric around “building a wall along the border of US and Mexico”. The border tax adjustment proposes to impose a tariff on imports at the marginal corporate tax rate, and to not tax revenues from exports. This potentially significantly improves the cost competitiveness of American produced products and if implemented, should result in a mildly positive near term impact on US GDP growth as import falls and trade balance narrows.
China likely to be the main victim but rippling effects across Asian supply chain will also be significant
Given Asia’s role as a major global trade hub with its intertwined, intra-regional supply chains spanning a number of economies, we acknowledge that the region is more exposed to trade-related external shocks than many other regions in the world. At a regional level, Asia makes up 67% of the US goods trade deficit and accounts for 8 of the top 15 countries with which the US runs a goods trade deficit. Currently, 85% of US imports from Asia are end products (rather than intermediate goods or raw materials) with a significant portion coming from China, which is by far the country where the US has the largest trade deficits with and hence is likely to be hurt most by US’ trade protectionist policy. Noteworthy however is that China imports close to 50% of intermediate goods from the broader Asia region, suggesting a considerable reliance on Asia’s supply network.* Therefore, although we do not believe the US will displace major manufacturing powerhouses like China, which has built up competitive advantages over the past decades in large-scale manufacturing, we recognize any direct trade impacts between the US and China will likely be reverberated across the entire Asian production line.
In conclusion, while border tax adjustment may be a more realistic form of trade protectionism to be implemented by the Trump administration, execution remains uncertain and we do not yet have clarity as to what extent the types of goods would be covered. However, trade barriers (border tax adjustment or otherwise) would have a transformational impact on the US trade relationship with the rest of the world if implemented. Therefore, we remain watchful of the heightened trade protectionism risk, especially as we think an implementation of trade barriers from the US can be quite negative for Asia and such risk is not yet well understood by investors and is still currently underpriced.
Onderzoek & insights
*Sources: BlackRock, Bloomberg, Feb 2017
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