As the US transitions to a new administration, the risks of trade protectionism are rising, with broad ramifications at home and among its trading partners, especially in Asia, which accounts for 67% of the US goods trade deficit, a recent Morgan Stanley research report said.
While increased protectionism is not the base case, the risk of it occurring is meaningful. Such policies might improve US economic conditions in the near term, but the long-range effects of protectionism—from proposed tax reform to import tariffs and potential renegotiation of free-trade agreements—would be negative, both domestically and globally, with particular impact on countries such as China and sectors such as telecom equipment, computers and passenger cars, morganstanley.com reported.
In recent years, global trade has already grown sluggish, compared to previous periods. From 2011 through 2016, the volume of world trade was 25% below what it would have been, had it followed the same growth trajectory observed between 2001 and 2007, notes Chetan Ahya, Morgan Stanley's co-head of global economics. The slowdown is rooted in several factors, including cyclical conditions, such as a stronger dollar and lower commodity prices, as well as changing growth patterns for large countries and the lack of progress on trade deals.
The shifting rhetoric in the US has raised the risk of increasing protectionism, with potential negative repercussions on growth. “A more protectionist US regime would only add to the challenge of a slowing global productivity trend," Ahya says.
In the US, trade policy changes could begin with proposed “border adjustability” rules as part of a broader slate of tax reforms. This Republican-backed plan would in essence bar deductions on imports, and eliminate taxes on export revenues. The controversial proposal would benefit net exporters and hinder net importers, leaving retailers and multinational corporations with international supply chains especially exposed, says Michael Zezas, Morgan Stanley’s municipal strategist who has also been leading coverage of policy issues.
Asia Impact and Reprisal
Not surprisingly, given its role as global trade hub, Asia would bear the brunt of any US shift toward protectionism. Consider that 8 of the 15 countries with which the US has a trade deficit are in Asia, including South Korea, Japan and China, all of whom would feel the sting of the US’s potential protectionist swing.
Still, China would be the most affected. The US is a heavy importer of finished goods from China. Its $348 billion trade deficit with China is far larger than any other trading partner; Japan comes in a distant second at $69 billion. However, China relies on a complex network of regional suppliers to produce these products, everything from cellphones and computers to toys, games and sporting goods, says Robin Xing, chief China economist. “The interconnectedness of the Asian economy would mean that changes in US trade policies would reverberate across the region," he says.
The knock-on effects could be substantial. Slowing imports to the US would hurt any number of Asian sectors, especially manufacturers of telecommunications equipment, computers and data-processing parts, and as well car makers, among others.
That would likely prompt a variety of retaliatory responses from Asian policymakers. To start with, China and other trading partners might launch investigations into specific sectors and restrict US companies from doing business in their countries. If conditions escalate and worsen, China could enact its own tariffs on imports of US goods and restrict engagement with US services, Xing says. The latter is no small matter, as the US enjoys a $33 billion services trade surplus with China.
A GDP Gamble
Could gains at home be worth the potential global fallout? After all, the ultimate purpose of these trade policies is to revive the manufacturing sector, growing jobs in the process.
That may be easier said than done, says Ellen Zentner, Morgan Stanley's chief US economist. “Decades-long shrinkage in US manufacturing has not only reduced the size of the manufacturing sector to 10% of total private sector jobs, but years of sluggish demand for US manufactured goods also led to a mass exodus of workers and loss of skills," she says.
Even if companies begin to create jobs stateside, they may not be able to find the right workers to staff them, at least, in the near term. The policies could boost US GDP growth slightly in the short run, Zentner estimates. However, this would come primarily from a reduction in the trade deficit.
