Anyone hoping that Donald Trump’s campaign promises were just talk can’t have been encouraged by this weekend’s events. Stock markets fell and the dollar was volatile yesterday on the news that the President had signed an executive order banning the entry of people from seven countries. Assumptions that he would row back from his more protectionist campaign pledges now look rather flimsy.
Since his inauguration, Trump has pulled the US from the Trans-Pacific Partnership, and threatened to renegotiate Nafta, a trade pact with Canada and Mexico. Two of his advisers have mooted plans for a tax on Mexican imports of up to 20 per cent to ensure the funds for a border wall come from America’s southern neighbour. Promises to label China a currency manipulator and slap tariffs of 45 per cent on its exports to the US have not yet materialised, but this doesn’t mean that they will not.
So which markets are most vulnerable to the threat of Trump’s protectionism?
Trump’s trade policy is underpinned by mercantilism, or the view that the US should export more goods than it imports from abroad. According to Ashmore, just 10 countries account for 71 per cent of all America’s imports, so although economists have roundly criticised the arbitrary goal of a trade surplus if it results in higher prices for consumers, increasing tariffs on exports from just a few big “offenders”, such as China, Mexico, India and South Korea, could redress the balance.
“Their vulnerability to US protectionism depends in part on the degree of imbalance in their trade with the US as well as their capacity to retaliate, which can be approximated roughly by the absolute size of their imports from the US,” wrote Jan Dehn, head of research at Ashmore, in a recent note.
Ashmore’s base case is that Trump will row back from the threat of extreme protectionism. This might explain why he hasn’t yet been too bellicose towards China. China has signalled that it might retaliate by putting tariffs on American goods. While the States absorbed $251bn (£201bn) more in goods from China last year than it exported, Trump will be wary of jeopardising the $116bn of exports which the US does send each year. Data from Morgan Stanley show that Ambarella, Texas Instruments, Qualcomm and other US firms depend on China for over half their sales.
Mexico, Canada and Nafta
Mexico’s trade surplus with America is much lower, amounting to about $75bn in 2015. However, Trump has much greater leverage over America’s southern neighbour because trade with the US – which is tariff-free under Nafta – accounts for a much higher percentage of Mexico’s GDP than America’s.
Markets expect Mexico to be most at risk from the Trump administration; the peso has fallen more than 15 per cent since the election. In contrast, Canada has relatively balanced trade with the US, and the US is reliant on its energy exports. But Mexico may have some comeback. Luis Videgaray, the foreign minister, has hinted that he might leverage security co-operation to get Trump to climb down.
Mexico’s problem is that the President sees trade as a means of achieving other “America First” policies, so any eventual decision on Nafta may not be hard-headed. Higher tariffs are being used as a threat to press US and Japanese carmakers like Ford and Toyota into investing more in US plants and creating jobs.
The supply chain: Japan, Taiwan and South Korea
Economists have warned that the US may be hit in unpredictable ways by hiking tariffs on Mexico, because US firms in a number of sectors have supply chains running through it. Goldman Sachs has identified South Korea and Taiwan, which are embedded within the supply chain of companies such as Apple, as more vulnerable to an increase in US tariffs on China than China itself.
Japanese firms are likely to be apprehensive. Even if Trump doesn’t impose tariffs on Japan itself – and he has described the US deficit with Japan as a “disaster” – Toyota and others use Mexico and China to assemble their goods before shipping them to the US.
According to Marcel Thielant and Mark Williams of Capital Economics, a tariff on car parts or heavy vehicles from Mexico, for example, would have much further-reaching consequences than one which just covered passenger cars themselves. In the year to November 2016, Mexico exported $51.6bn in car parts to the US, compared with just $21.5bn in passenger cars. Japanese firms accounted for much of this.
A cheaper peso would offset some of the extra cost, but the saving grace for Japanese firms may be the similarly injurious impact it would have for US companies. Indeed, the biggest barrier to Trump’s protectionist plans may be a strengthening dollar which risks making US exporters uncompetitive. And as a huge holder of US government bonds, if higher inflation causes interest rates to rise quickly this year, China might choose to sell them as their value diminishes.
Unfortunately for Trump, trade is rarely a zero-sum game.