The arrival of Donald Trump to the White House is widely being perceived as a momentous event whose consequences we are still struggling to understand.
For the international trading system the new American administration represents – in posture if not yet in substance – a radical departure from decades of commitment to free trade and multilateralism. The commanding heights of the most powerful country seem now to be steering towards nationalism and protectionism. Sinister echoes of the 1930s are readily linked to visions of an imminent collapse of our globalised world.
- Should we be worried?
- Should we expect a poorer, more insular future?
First of all, let’s try to understand what is hiding behind the rhetoric, what the consequences of its implementation would be and, most importantly, let’s be prepared for the most likely scenario.
Donald Trump (source: The Independent)
Trump’s Economic Plan
Trump’s vision of “buy American and hire America” has already been translated in practice with the retreat from the Trans-Pacific Partnership. Trump has also threatened to impose high tariffs against China (45%) and Mexico (35%). Last Thursday (26 January 2017) it seemed like a 20% levy against imports from Mexico would be effectively adopted, only for the Administration to backpedal shortly after.
This apparently confusing and contradictory stance can be explained if we look at the position held by the current head of the National Trade Council, Peter Navarro. With an interest in China and views about the American trade deficit that would puzzle the vast majority of economists, Navarro believes that the current trading relations are detrimental to the United States. His objective is to use the threat of protectionism to reverse the trade deficit and bring manufacturing jobs back to America. Trump’s economic plan, which was written by Navarro himself, is pretty clear in this regard:
”Tariffs will be used not as an end game but rather as a negotiating tool to encourage our trading partners to cease cheating. If, however, the cheating does not stop, Trump will impose appropriate defensive tariffs to level the playing field.”
Peter Navarro (source: Yahoo Finance)
In other words this is not a protectionist policy, but a policy that might use protectionist measures to reach it goals. But what can we say about the probability of such measures being effectively adopted? The first consideration that we should make is that protectionism by means of import duties is, fundamentally, an outdated tool ill-suited to manage contemporary globalisation. As Richard Baldwin explains in his last book (The Great Convergence), “tariffs that might have been pro-industry under the Old Globalization had become anti-industry under the New Globalization”.
The latter is characterised by global supply chains, where parts and components are exported and imported at different stages of the production process. Hence tariffs would make globally integrated industries, many of which are American, less competitive internationally. At the same time, partial onshoring would likely take place in forms that would be highly automated (robotics and, in the foreseeable future, 3D printing might become the technologies of choice in this scenario). In the end neither jobs nor a trade surplus would be generated if the United States were to enact protectionist measures. As former head of the WTO Pascal Lamy recently said, commenting on the hypothetical 45% tariff on Chinese imports: it would “harm the US incredibly more than China”.
How to survive the incoming supply chain wars
The Peterson Institute for International Economics has published a study highlighting possible scenarios deriving from the adoption of protectionist measures by Trump’s administration. The most interesting one is called “asymmetric trade war” or “supply chain war”, where a country like China might decide to respond to a surge in tariffs by denying access to certain goods, either by forbidding their sale or stopping from buying them, hence disrupting the supply chains themselves. As a response, they might be reshaped by relocating certain stages in other countries or regions, bypassing bilateral restrictions.
Clearly there are other issues related to international business that go beyond the current economic climate. Just to name two:
- How large multinational corporations are operating is changing profoundly (Soucre),
- while globalisation itself might be entering in a complex phase of “recalibration” following the deep integration of the last two decades (Source).
Both trends require attention and strategic thinking. But in the short term Trumponomics might not be as scary as it seems.
Here is what to do
In conclusion we should keep in mind three points:
1. Barking dogs seldom bite!
The one in the White House has been barking a lot lately, but do not be afraid. Understanding the intentions behind certain proclamations and the possible ramifications of a new trade policy, if and when it will be adopted, is wiser than panicking.
2. International supply chains are here to stay.
There is no reason to believe that severe protectionist measures will be eventually taken, nor that they will be able to completely retrench the activities of companies within national borders. Serious disruptions would certainly be possible, but the more likely scenario is that trade routes will be reshaped to respond to the new environment.
3. Don’t be late!
It is important, now more than ever, for business leaders to master the right tools that will allow their companies to be flexible and responsive to the possibility of changes in the competitive environment.
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Head of Business Intelligence @Steel Available