Testing times for international trade 

Brexit and the election of Donald Trump have served to shake up the international trading environment, says Gary Stockdale, head of Investment Strategy at Vertem

The main thrust of Donald Trump’s election campaign was putting ‘America First’. The underlying notion being that a series of bad trade deals has allowed America to be exploited, at the cost of jobs and the standard of living of employees. The President has therefore adopted a more mercantilist approach. By this I mean he has focused on trade imbalances, and those trading relations that have resulted in significant trade deficits. Trump has a notable distrust of multilateral trading agreements, which were very much in favour from the late 20th century onwards. This accounts for his willingness to robustly renegotiate, or even walk away from, existing multilateral agreements such as The North American Free Trade Agreement (NAFTA).  

However, Trump’s most vexing trading relationship has been China, with whom the US runs a very large trading deficit. Taking data from US Commerce Department, in January and February 2018, the trade balance with China was -$65.214bn. This is viewed as evidence of exploitative trading arrangements.    

China is in some ways an enigma. In one sense it is considered a developing market, but at the same time it wields enormous – and indeed, growing – power globally. Trump has a point. Chinese companies can access the US market on far more advantageous terms than the reciprocal side of the deal. It is very common for developing nations to block full foreign ownership of domestic enterprises. But this also leads to the leakage of intellectual capital, as joint-ventures necessitate the sharing of knowledge. China has used these arrangements very smartly as it has risen up the value-added chain. China is no longer only about mass producing cheap goods. 

The US President has responded by deploying those aforementioned mercantilist methods. He has progressed this through the potential use of trade tariffs, and the tightening of domestic regulations in areas such as the acquisition of US businesses.  

It is also worth noting the peculiar negotiating tactics deployed. I liken these to ‘hand-grenade’ diplomacy. Making incendiary comments and remarks to unsettle his negotiating partners. While shocking initially, the world is becoming familiar with this approach. It is easy to become despondent for the prospects for global trade, but a race to raise trade tariffs would hurt consumers worldwide and likely threaten many jobs in the process.  

It is unlikely that Trump will turn his back on global trade. What he desires is a reset of relations. Arrangements that reflect more accurately the global order. 

Brexit is very different. Here, the UK is balancing the attraction of exploiting the opportunities that come with the freedom to negotiate its own trading arrangements independently, with the dangers of disturbing relations with its most important economic partner. As the UK and EU set about negotiating the basis of their future relationship, the financial services industry will likely be a key battleground. The UK is a big exporter of services to the EU, while at the same time being a big importer of goods from the block. But the EU can only leverage this dynamic so far. Inhibiting access to the expertise provided by the City of London would be counterproductive. One only has to consider the turbulence at Deutsche Bank to conclude that Europe does not excel in finance. Europe and the UK need to trade with each other and eventfully this will be reflected in the course of negotiations. 

Vertem
www.vertemassetmanagement.com
@vertemam

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