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- All three are card-carrying economic nationalists with strong leanings toward protectionist and interventionist policies. This is a clear signal that Trump’s election season hyperbole should be taken seriously.
- There is little reason to doubt that a Trump Administration would follow through on all of its clearly stated and overly simplistic trade logic.
(AP Photo/John Minchillo, File)
Speculation on the topic of Donald Trump's trade policies has been widespread. On one extreme, observers claim that Trump’s threats are more bark than bite: the real goal is to force America's trading partners to the negotiation table, where, when confronted by a superior bargaining position, they would quickly fall into line with the “America First” agenda. On the other extreme, alarmists are predicting trade wars, an unraveling of the American-led international trading framework and, ultimately, geopolitical upheaval. It seems nothing can be ruled out. Remember, all of this began with the very unlikely possibility of a Trump candidacy, followed by an even more outlandish election which has now produced deadly serious consequences for the entire world.
So how should stakeholders prepare for the uncertainty of the Trump Trade Doctrine?
The answer: first, look at who Trump has anointed as his most trusted trade advisers, and, secondly, look at what they have written (what precious little exists) about trade policy.
The Advisers
Three individuals will have an inordinate amount of power to influence White House trade policy and to shape the landscape of international trade: Peter Navarro, the head of the newly established White House National Trade Council; Wilbur Ross, Trump’s nominated Secretary of Commerce; and, Robert Lighthizer the newly appointed United States Trade Representative (USTR).
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Peter Navarro — dubbed Trump’s “Trade Czar” — has established himself as an outspoken “anti-China” academic and is spoiling for a fight with America’s second largest trading partner. Wilbur Ross, a billionaire investor, holds equally strong opinions and regards China as the world’s most egregious trade-cheater and free-rider. He, too, is primed and ready to take action. Robert Lighthizer is the only inner circle appointee with previous government experience, having served in the USTR office during the Reagan era. Lighthizer established his credentials by aggressively prosecuting a campaign of voluntary restraint agreements, countervailing duties and anti-dumping duties against Japanese imports during the 1980s, at a time when Japan was enjoying its economic heyday as Asia’s top exporter.
Overview of the Trump Trade Doctrine
A brief paper written in September, 2016, entitled “Scoring the Trump Economic Plan,” by Peter Navarro and Wilbur Ross, is the primary road map for Trump’s policies. It sets out the cornerstones of Trumpian Trade Policy and the rationale behind a new hard-line approach to managing global trade. Below are the highlights from the paper.
The Great American Bargaining Chip
The United States boasts the largest and most advanced economy in the world. Quite simply: the world needs America more than America needs the rest of the world. But American leadership has failed to leverage this unique advantage when negotiating free trade deals and other international agreements.
Instead, in exchange for trading and operating in the U.S. economy, U.S. leadership should extract tangible concessions from allies and trading partners— similar to what China has done during its rise as a major power.
Under the Navarro-Ross vision, the U.S. must become an unapologetic opportunist, putting America's self-interest first. This starts by “renegotiating” existing trade deals and scrapping all bad ones. Trump and his team have already said “no” to the Trans-Pacific Partnership (TPP), shrugging off the collateral damage this has inflicted on American prestige and influence in Asia. They have said they will go after the NAFTA and other FTAs as well, and renegotiate them under an “America First” agenda.
Even America’s membership in the WTO should be reconsidered, say Navarro and Ross. One particularly glaring injustice is that the majority of WTO member countries assess import and export valued added taxes (VAT) in addition to customs duties against U.S. products, while the U.S. does not assess VAT against any imports. But if the U.S, as the world's largest economy, threatened to pull out of the WTO, this would spell doom for other trading nations and they would quickly acquiesce to the Trump White House.
Trade is a Zero Sum Game
If America runs a trade deficit, in any sector, it’s losing in the trade game. Under this new mercantilism, America must re-balance and redistribute these deficits by imposing protectionist tariffs against any products that threaten a trade imbalance. In this vein, the White House must “punish” unpatriotic American firms that move production abroad. This will involve a so-called “border tax” against imports on foreign made articles, arriving back into the U.S. from cross-border value chains.
Trump’s high-profile corporate welfare program, which has already featured the public spectacles of the Ford Motor Company and Carrier Corp’s capitulating on where to locate manufacturing operations, is a taste of things to come.
China is Already in a Trade War With America
Beijing has been in a trade war with America — by its own design — since China joined the WTO in 2001, but American leadership has been too passive or too naive to acknowledge this fact. It’s time to hit back hard.
China Inc. has been gaming the rules-based trading system by surreptitiously subsidizing and dumping its exports, selectively blocking trade in strategic goods, systematically stealing intellectual property and cleverly circumventing rules of origin.
Ross and Navarro have repeatedly stated that they will steer a Trump White House into confronting the Chinese, and, if push came to shove, they believe that Beijing would have more to lose than Washington.
Protectionist Tariffs Must be Implemented
To execute the “Make America Great Again” agenda, the Trump Trade Doctrine calls for a 45% tariff against Chinese products and 35% tariff against goods from Mexico, as well as a swath of tariffs against so-called currency manipulators, which could include Japan, South Korea and even the European Union (Germany?). Together, these countries constitute the majority of America’s top trading partners. In the view of Trump’s advisory team, all would eventually bend to the will of the President, or reach a mutual compromise before things got out of hand.
Disrupted Supply Chains Will Adjust
In the long-term, protectionist tariffs would have a relatively minor impact on the overall U.S. economy, due to the percentage of U.S. jobs that are tied directly to exports—about 10% of GDP or about 11 million jobs out of a workforce of 124 million. China’s export sector accounts for 23% of its GDP; and, for Mexico, it’s as high as 35%.
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Yes, there would be supply chain disruptions and job losses, with a manageable impact on the economy, say Navarro and Ross, but these would be short-term, as supply chains adjust and reconfigure and more firms begin to leapfrog over import tariffs by relocating operations within the U.S. They point out that this is precisely what happened in the 1980s when the Reagan administration pounded Japanese automakers and steel producers into submission with a series voluntary restraint agreements and anti-dumping and countervailing duty initiatives.
How Will It All Play Out?
There is little reason to doubt that a Trump Administration would follow through on all of its clearly stated and overly simplistic trade logic.However, no one can realistically predict how far this will go or how badly it could backfire.
The world has changed considerably since the Reagan administration man-handled Japanese firms in the 1980s. Today's Chinese juggernaut is a completely different animal, and 2017 is probably the worst year to pick a fight with the Chinese, given that in the autumn, the 19th National Party Congress is set to replace a significant portion of the Politburo Standing Committee. In the run-up to this big event, President Xi Jinping will need to project a strong nationalist bent and would be forced to react strongly to any ill-timed actions by the Trump trade policy team. This is a scenario that could lead to miscalculation, misunderstandings and rapid escalation, with long term geopolitical consequences.
Nor is it certain to what extent the U.S. Congress would oppose what’s arguably the most trade-hostile and potentially disruptive group to occupy the White House in more than 100 years. What’s clear is that firms, governments and other stakeholders need to get ready for uncertainty and disruption on an epic scale.
Change is coming fast.
Countries signed on to the UN’s Paris Agreement are turning to green bonds as a way to enlist private investors in their fight against climate change.
Green bonds suddenly have a whole new reason for being. What was in 2013 a $9 billion niche market of bond offerings tied to environmental projects has this year surged to $72 billion of issuance in the 11 months to end-November 20161. Moody’s Investors Service expects it to exceed $80 billion by the end of 2016, almost double the previous record set in 20152.
The United Nations Paris Agreement3, is a major reason for the boost, according to Morgan Stanley bankers and other industry participants, and it could be a game-changer for green bonds.
“This used to be a market that was driven by investor demand for sustainable products,” says Navindu Katugampola, an executive director spearheading green bond origination in Morgan Stanley’s global capital markets group. “Now countries are driving issuance from the top-down as a way to fund their individual carbon-reducing targets under the accord.”
China has led the charge. After developing a local green bond market, along with standards for bond issuance, Chinese companies and public entities have raised $29 billion in the 11 months to end-November4. That includes deals by the People's Bank of China, which co-chairs with the Bank of England Bank a G20 Green Finance Study Group. That group issued a report in September, identifying ways international development banks and other organizations can support the development of local currency green bond markets around the world.
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Many of the Chinese deals have been domestic local currency offerings. Other countries like Mexico, India and Brazil have also moved to develop domestic green bond markets.
France is looking to expand the green bond investor base to include government bond investors. In a press release government officials reaffirmed the country's role in meeting commitments under the Paris Agreement and said France wants to be the first to issue a sovereign green bond in 2017.
“Reports are that Poland is also looking to issue a sovereign green bond in the near future,” says Katugampola. Sovereign green bonds would open the doors to government bond or “rate” investors.
Bank of England Governor Mark Carney is also promoting the use of green bonds in the fight against climate change. In a recent speech in Berlin, Carney argued that green finance “cannot conceivably remain a niche interest over the medium term”, adding that at the request of G20 leaders, “…authorities are exploring ways to mobilize private capital for green investments…One proposal is international collaboration to facilitate cross-border investment in green bonds. The development of this new global asset class is an opportunity to advance a low carbon future…”.
France’s new law for asset managers also went into effect this year. It outlines new reporting requirements for French asset managers on their contribution to national and international efforts to limit global warming. “This is a very significant move, and many wonder whether it will spread throughout Europe,” says Katugampola. “It means that French asset managers could proactively look for securities that will reduce their carbon footprint. It has the potential to significantly boost demand, and create a virtuous circle at a time when supply is also increasing.”
There are reasons to be optimistic about green bond issuance in the U.S., says Katugampola, even though the incoming administration might change environmental regulations. Morgan Stanley Research6 expects Clean energy use to continue growing in the country, and States and Municipalities are issuing green bonds in the municipal market.
The U.S. asset management industry also plans to roll out more sustainable investing strategies over the next 12 months, after seeing U.S. assets under management using sustainable investing criteria jump 135% from 2012’s $3.74 trillion to $8.72 trillion at the beginning of 20167.
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