U.S. Protectionism risk

The threat of protectionism in the U.S. poses a significant risk to emerging economies exporters. The US, Canada and Mexico are scheduled to start formal talks to renegotiate NAFTA in the next two months. In the meantime, Mr. Trump’s attention might shift to other emerging market, – including South Korea and India –, that also run large trade surpluses with the U.S. However, it’s worth noting that, in the first instance, the impact of any trade restrictions in most cases would probably come via weaker investment as firms delay expansion plans.

The U.S. main trade’s partners

The U.S. totalized in 2016, $3.64 trillion total trade, $2.19 trillion or 60% (imports) and $1.45 or 40% (exports). If Mexico and the NAFTA treaty has been the focus of the rhetoric “America first”, the reality is completely different. For instance, the 65 point gap between the share of goods exported to Ireland versus imported for Ireland is the largest among the top 15 U.S. trade partners. In dollars term, China is on the top of the list. In 2016, the U.S. bought $347 billion more than it sold to China.

Besides, the Trump fixation on NAFTA is not logical considering the weak trade deficit between both countries 14 point gap between the share of good exported versus the good and services exported. This does not consider strategic investment from the U.S. automakers in Mexico ($1.6 billion) or the 3 million oil barrels/days imported from Canada and difficult to replace.


No Global Trade War

We do not expect generalised unilateral measures against all countries. Regarding the two countries explicitly named by Trump in his campaign (Mexico and China), only Mexico has already clearly been threatened by targeted measures.

The New Administration will not take any significant measures against the People’s Republic of China, as they would probably give rise to radical retaliation measures, which could hit U.S. food, car and aerospace exports. Remember that 2017 is a year of major political transition for Xi Jinping (ahead of the Communist Party Congress in September). He therefore could not accept such an offensive without reacting. As China is one of the primary drivers of our markets in Asia pacific, we remain confident on the region.

The Tax border adjustment: a wrong good idea

It now seems more likely that Donald Trump will support the 20% border adjustment tax advocated by Congressional Republicans as part of a comprehensive package of corporate tax reforms. This could have some negative impact on global trade and affect our markets. Likely, other governments will not open to an apparent war with the U.S. but they would eventually retaliate in some form. The resulting increase in the cost of trade, and in uncertainty over future trade policy, would inevitably take a toll on global growth.

This measure also could have some negative implications for the U.S. economy. Indeed, the importance of supply chain in the modern economy could seriously disrupt some industries, like automobile, and be counter-productive. It would also imply very strong redistribution effects between sectors and companies and would be opposed by many lobbies. The macroeconomic effects would likely be negative (rising dollar, downward pressure on margins and upward pressure on prices following by an increase of interest rates). Such measure will drive the dollar higher in opposition to the new administration will.