The world has never been more interconnected than it is today, with trillions of dollars of goods and capital and millions of people flowing across borders every day.
Most economists would argue that this phenomenon of ‘globalisation’ is a very good thing. It allows economies to specialise in the areas where they are most efficient and import those goods and services that other countries are better at producing.
Economies can grow more quickly than would be the case if they erected trade barriers to protect inefficient industries. Meanwhile, individuals benefit from better employment opportunities, higher wages and cheaper goods.
Certainly, the US has gained significantly from globalisation. Its enormous domestic market encouraged the development of vast, highly efficient, technologically-advanced and well-resourced companies that have conquered markets across the globe. Think of Apple, Microsoft, Boeing, etc.
Yet President Trump recently used a speech at the United Nations to “reject the ideology of globalism”. He has already acted on his rhetoric, imposing tariffs on Chinese imports and renegotiating trade deals with various partners. These measures, Trump argues, will help reduce America’s huge foreign trade deficit.
However, this focus on America’s trade deficit ignores the wider economic picture. While it is true that the bilateral trade deficit with China, for example, stood at $375 billion last year, US companies are far more active in China than vice versa. The subsidiaries of US multinationals based in China made $222 billion in sales to the country’s increasingly-affluent consumers in 2015, according to the most recent official figures (data for Chinese sales in the US is not available, but they are likely to be far smaller).
The trade imbalance between the two countries is even less clear when the global nature of modern supply chains is considered. Take Trump’s call for Apple to build iPhones in the US rather than in Chinese factories as part of his bid to revive US manufacturing. While iPhone imports add billions to the trade deficit each year, recent estimates show China only makes about $8 per unit . The bulk of profits accrue either to Apple itself or to other countries that specialise in the more value-added components of the product. Moreover, if the iPhone were entirely made in the US, its price would be significantly higher. That would only benefit Apple’s non-American competitors such as Samsung.
Trump has now pushed the US to the brink of a trade war with China with alarming implications for the global economy. For an all-out trade dispute could sunder the global trading system into oppositional blocs reminiscent of the dark days of the protectionist 1930s, the era of the Great Depression.
Equity markets in the euro zone and Japan – regions in which trade accounts for around one third of GDP growth – would be hard hit. But the biggest losers would likely be emerging markets. Trump’s skirmishes on the trade front have already contributed to declines in share markets in China and the emerging economies. Over the longer term, protectionism risks reversing the gains made by emerging economies over recent decades, although the damage will not be restricted to these markets.
Trump may be reckoning the US is rich and powerful enough to capitalise on the economic chaos his trade policy threatens to unleash. It is a risky gamble since the US requires foreign buyers for its rising debt. Many of the US dollars that flow across the Pacific to buy Chinese and other Asian goods are reinvested back in US government debt. If Asian appetite for US debt falters, interest rates in America may have to rise to attract other foreign buyers.
Interim Head of Investment Strategy, Multi-asset and Macro
Michael is interim Head of Investment Strategy and is responsible for formulating our ‘House View’ and the risks to that view, as well as overseeing the SIG process for the AIMS funds. Since joining Aviva Investors as Senior Economist and Strategist, Michael has been responsible for monitoring and analysing global macroeconomic, market and policy developments.