In this video, our chief economist Eric Lascelles discusses how the U.S. is changing its trading relationship with the world in response to anxiety over its chronic trade deficit with many countries.
He looks at how the U.S. has gone about trying to resolve this deficit by putting tariffs on the main countries responsible for it. In particular, he examines the U.S-China trade dispute and why it doesn’t seem to have an immediate resolution. Eric then explains why a world with more tariffs is likely to see a slowing of globalization, a significant driving force behind global growth over the past few decades.
How is the United States changing its trading relationship with the world? Where could this lead?
Well after a long period of open and free trade we’ve seen the U.S. pivot and really express anxiety about this chronic trade deficit at the U.S. sports versus many other countries and it’s going about trying to resolve that and I don't know that all economists would agree on the techniques but the most obvious approach is to implement tariffs on countries that are responsible for that U.S. trade deficit and for the moment we’ve seen some of those disputes resolved and resolved in some cases nearly amicably, but the U.S.-China disagreement is proving a stickier one and one that doesn’t seem to have an immediate resolution and so, we’re now in a world in which there are some impediments to trade and, in terms of the U.S. motivation you can say some of the arguments are fairly sound; the U.S. did have something of a bad trade deal in some cases beforehand, bigger tariffs hitting it then the reverse. But some of the logic isn't quite as sound. And so for example, it’s unlikely that any serious manufacturing employment relocates itself to the U.S. after this, because most of those jobs were actually lost to automation, not to the rest of the world.
Will rising protectionism lead to the decline of globalization?
There’s no question one of the great success stories of the last half century has been rising globalization. That is to say trade growth has massively helped paced economic growth as the world has tied itself ever closer together and giving people more selection and in some cases cheaper pools of labor and in many cases higher quality and more goods, and so it’s been a win, just about all the way around, but maybe “just about” is the key element there in the sense that, some have lost; there has been some who have lost entire sectors of employment as a result of this and that’s helped to spur the populism that’s reversing globalization now and, so globalization no longer obviously advancing, tariffs’ a big reason why, just making trade less financially logical.
And I guess the other thought is; we already had begun to see globalization slowing. So while tariffs are a big part of this, let’s recognize there were massive forward tailwinds of pushes helping globalization over the last few decades, like the NAFTA Agreement and the formation of the European Union and China entering the World Trade Organization and those things were all very good and they are still good, but the benefit has mostly been absorbed already. Those countries are fully integrated, we weren’t getting those tailwinds and so, the forces of globalization had already been slowing, and now we have some tariffs that are slowing that further.
Why is there a trend now to move away from free trade?
Well when we look at the decline in free trade and decline in globalization recently, a lot of it tracks back through protectionism of course, but all the way back to populism and the idea that, over the last decade or so, and really to some extent around the world not exclusively a U.S. phenomenon, we’ve seen more populist type governments come into place and, that’s a difficult term to precisely define, but you might say it’s a rejection of the status quo policies, the open markets and so on that have prevailed over the last few decades. It’s searching for something better. I don't know that it’s finding something better necessarily, but this search is an honest one in the sense that people are responding to the failures of the global financial crisis and saying: “Existing policies clearly didn’t work all that well in that case.” It’s responding to rising inequality overtime and one wondering if there might be a way to rebalance the scales to some extent, and…
So just a general dissatisfaction with what has been an era of slow growth and, unfortunately there are some undesirable elements of populism, it tends to restrict trade, can restrict immigration and there's some economic damage that emerges from that and I suppose we’re starting to see that to some extent. It may also be worth thinking about this in a broader sense, which is; we’re shifting from a hegemonic era, the U.S. has been this dominant economic entity with really no true rivals for quite a number of decades now, to a much more multipolar era with the U.S. and China, both, vying not just for economic power but maybe for influence more generally and, in that kind of world historically, multipolar eras are not as good for trade, not as good for globalization, maybe not as good for growth and you end up with different cliques of countries that just don’t interact with each other quite as well, and the global institutions that have been so important for supporting growth don’t enjoy the same backing.
Why is it important for investors to understand how protectionism works and how it impacts economic growth?
It’s quite clear that protectionism has had an impact on financial markets, every time concerns have risen as they did in late 2018 as they did in May of 2019, we’ve seen the stock market and other so-called risk assets retreat and so there very clearly is a linkage here and I think that’s the obvious reason why investors should be paying attention to protectionism; it does affect their portfolios, I should equally mention two other perhaps offsetting forces: the first one is, when we tally up the damage from protectionism, it’s not overwhelming, and so it’s notable, certainly unfortunate, it does act as a drag on things like stocks and perhaps holds bond yields down a little bit more as well, but it’s not…
It’s not the only factor that matters, it’s not an overwhelming effect, but it might be an effect that sticks around. And so here we are in particular with this U.S.-China relationship that might prove more difficult to resolve than some of the trade frictions with Mexico or Canada, just two economic super powers and the U.S. really, somewhat cheekily asking China to change its very economic structure and China not feeling particularly inclined toward that and so, as a result my suspicion is, although the drags are mild, they may persist for sometime and they could slightly undershoot returns as to what they might otherwise had been.