Words have consequences, and perhaps no words are more consequential than those of the president of the United States.
The Nov. 8 election of Donald Trump, a populist whose campaign emphasized reversing the trade liberalization trend of recent decades, created instantaneous uncertainty for supply chains worldwide. Global trade liberalization will not grind to a halt throughout the world, but the election’s outcome should cause those who run multinational corporations to carefully and diligently contemplate its implications.
It is fair to start by asking just how closely we can expect Trump’s actions as president to align with his positions during the campaign. According to an analysis from the fact-checking website Politifact, President Obama either kept or reasonably compromised on 71 percent of the more than 500 campaign promises he made as a candidate, and these findings align with decades of academic research on prior presidents.
It is reasonable, therefore, to assume for any planning purposes that Trump will pursue at least two-thirds of his hallmark campaign themes while in office. With a Republican majority in both houses of Congress, we can expect many of them to be manifested as regulatory changes in the coming year or two.
Some of the tangible global trade-related promises Trump made as a candidate include withdrawing from the Trans-Pacific Partnership (TPP), threatening to withdraw from NAFTA unless its terms are changed, and labeling China a currency manipulator.
To be fair, Trump’s stance on TPP is actually somewhat nuanced. Instead of completely rejecting trade deals with TPP members, he seems to favor bilateral trade pacts over blanket regional agreements. While bilateral trade agreements can liberalize trade, most often they do so in ways that leave substantial regulatory fragmentation in place – the so-called “spaghetti bowl” effect.
One intended outcome of TPP was a reduction in trade complexity for many global corporations, as a single FTA would have covered a dozen trade parties. Bilateral trade deals with individual TPP members could result in similar tariff reductions, but companies would then have to deal with an increasing, not decreasing, number of individual FTAs, which could potentially increase their compliance burden. And negotiating new bilateral FTAs from scratch will take time, so companies will likely have to wait at least a few years before they can take advantage of them.
If TPP cannot be salvaged, this will also open the door for other regional trade deals to take its place, most notably the Regional Comprehensive Economic Partnership (RCEP) with China.
The president-elect’s opposition to NAFTA seems to be similarly nuanced. Trump does not appear to plan to reflexively leave NAFTA, but instead use the threat of leaving the trade pact as a means to get Mexico and Canada to agree to renegotiate the agreement on more favorable terms for the U.S. While this could lead to temporary disruptions in the availability of NAFTA benefits for companies, at this point it seems more likely the deal will survive, albeit in a somewhat altered form.
That being said, little is known about the actual changes that the Trump administration will seek to NAFTA terms. Since his ostensive objection to NAFTA stems from the relocation of jobs from the U.S. to Mexico, we can expect Trump to seek changes that favor placing manufacturing activities on U.S. soil.
Lastly, Trump’s pledge to label China a currency manipulator could have massive implications on industry.
U.S. law stipulates three conditions for labeling a country as such: the country must run a “significant” bilateral trade surplus with the U.S., have a “material” current account surplus, and be “engaged in persistent one-sided intervention in the foreign exchange market.” With a current account surplus of less than three percent of GDP and monetary policy that aims to inflate the value of the yuan, not depress it, China may not satisfy these conditions in any objective sense.
The Trump administration could, however, take other import-inhibiting measures toward China. As a candidate, Trump spoke of broad, across-the-board tariffs on imports from China, and his administration may seek to place punitive import duties on certain goods, such as Chinese steel and aluminum, or even large categories of manufactured goods.
If these measures are put in place, the price of Chinese goods will almost certainly rise in the U.S. Many of these products cannot be rapidly replaced by domestically produced alternatives in the required volumes, or are more expensive to produce here, which would create price inflation for consumers and industrial importers alike. Over time, however, new supply routes would emerge, whether from countries other than China or from new domestic sources.
Conversely, exports from the U.S. to China may come under pressure, either as a result of retaliatory tariff increases by China or through the Chinese government encouraging local companies to purchase from non-U.S. sources. This will create opportunities for non-U.S. manufacturers of comparable goods in China, and U.S. companies may struggle to replace those sales with demand from other markets given the enormity of the Chinese market and the current softness of demand in other parts of the world.
The coming trade policy shifts in the U.S. will reshape supply chains worldwide in fundamental ways. While the longer-term supply chain implications will depend on the specifics of the upcoming policies, companies should in any event get ready for a higher level of scrutiny around trade regulations, particularly FTA and import compliance.