GL_I_GlobalTrade_1

This article was first published in the March 2017 international edition of Accounting and Business magazine.

Fans of free trade are in a gloomy mood. Many fear that their cause is about to suffer its biggest setback in over half a century. 

‘Globalisation and free trade are under siege,’ says Gary Hufbauer, a fellow of the Peterson Institute for International Economics and a former US trade official. ‘After 50 years of opening up and economic progress we are at best at a great stopping point, and possibly at the start of a great unravelling.’

The principal worry is that the world’s two leading champions of free trade, the US and the UK, are turning their backs on globalisation – as illustrated by the UK vote to leave the European Union and the election of protectionist Donald Trump as US president. But even before these two upsets, Jeff Immelt, the chief executive of General Electric, warned that trade protectionism was on the rise in Europe, Latin America, Asia and Africa, and that assaults were coming from both the right and left of the political spectrum.

Justifiable pessimism?

Optimists may point out that both the UK government and the new Trump administration have denied being opponents of free trade. British prime minister Theresa May has called for ‘Global Britain’, and said her government plans to strike a series of deals around the globe. Meanwhile, Trump has said that he is ‘all for free trade, but it’s got to be fair’.

But most trade experts are not reassured. Starting with the US, the nation’s new president has a long record of hostility to free trade. ‘Trump looks set to be the most protectionist president since World War II,’ says Edward Alden, Bernard L Schwartz senior fellow at the Council on Foreign Relations. ‘He threatened to impose steep tariffs on China and Mexico during his presidential bid and has appointed hard-line anti-traders to key positions.’ As president-elect he took aim at US companies manufacturing in Mexico, warning General Motors via his Twitter account to ‘make in the USA or pay big border tax’. And most recently, in his inauguration speech he said: ‘We will follow two simple rules – buy American and hire American.’ That is at odds with one of the key aims of recent trade talks – namely, to ensure that companies, both homegrown and foreign, can compete on an equal footing for government contracts.

This attitude could have dire outcomes for numerous trade deals. ‘The US is at the heart of the global trading system,’ says Dan Ikenson, director of trade studies at the Cato Institute. ‘And the president has considerable power to implement protectionist measures and withdraw from treaties.’ In the short-term, the Trump administration is to freeze or euthanise several promising free trade deals. One of the new president’s first actions was to sign an executive order withdrawing from the Trans-Pacific Partnership (TPP), an ambitious effort to eliminate trade restrictions between 12 Pacific Rim countries, from Japan to Australia.

Second in the firing line could be the Transatlantic Trade and Investment Partnership (TTIP), an accord between the US and EU aimed mainly at dismantling regulatory barriers to trade and systems that favours domestic firms in bidding for government contracts. ‘Trump has made it clear that he is not an EU believer and has criticised Germany for having an excessive trade surplus,’ says Hufbauer. ‘All indications are that his team will have no desire to complete the TTIP talks.’

Nothing’s safe

More worrying still for free traders, Trump is expected to chip away at existing deals – mostly notably the North American Free Trade Agreement (Nafta), which eliminated tariffs on trade between the US, Canada and Mexico. During the campaign Trump described this as the ‘single worst trade deal ever’ and promised to renegotiate the treaty.

Across the other side of the Atlantic, Brexit threatens to have negative implications far beyond the UK. First, the UK government’s vision of striking a host of trade deals around the world will face a range of hurdles, says Hufbauer. ‘It will be almost impossible for the UK to engage in meaningful talks with anyone else until after a deal is struck with the EU, which will take years,’ he observes. Brexit will also place huge demands on the global trade negotiating system, says Alden. Since all of Britain’s trade deals are through the EU, the country could have to renegotiate everything – including membership of the World Trade Organisation, a process that needs to be ratified by 163 member nations. The UK will also not automatically retain access to over 50 trade deals struck by the EU with other nations. 

‘The upshot is that the UK could put a huge spanner in the global trading system,’ Alden says. ‘At the very least, for the next few years European trade negotiators will be totally consumed by the Brexit process. And many other countries will have to devote a lot of time and energy to establishing new rules for trading with the UK too.’

Finally, the omens in Europe for trade look worrying too. A trade deal with Canada, the Comprehensive Economic Trade Agreement (CETA), is expected to come into force. But some fear this could be the last deal we’ll see for some time. Protectionist spirits in Europe almost scuppered the deal. And bowing to this pressure, Europe has sanctioned a ratification process in which even regional bodies can veto trade deals. That will make future agreements even harder to achieve.

Corporate implications

The effect on global companies could be profound. Having come to rely on a gradual opening of markets, a reversal could produce several key results:

Localisation: Firms will want to avoid setting up factories in one place, only to discover that it will become more expensive to export to their end market. In response, General Electric’s Immelt says that his company would pivot to localisation, producing nearer to its final customers. ‘A localisation strategy can’t be shut down by protectionist policies,’ he argued in May. This means the unravelling of global supply chains, which have been a big source of efficiency and economic growth over the past 15 years, says Hufbauer. ‘Firms located in the most efficient places. In the future their choice of destination might be determined more by a desire to avoid political reprisals. Goodbye efficiency, hello higher costs.’ 

Low-cost losers: Nations that have positioned themselves as export hubs – such as Mexico – could lose out. Soon after Trump spoke disparagingly of car exports from Mexico to the US, Ford told Mexico’s government of its intent to abandon a $1.6bn investment in a car factory there.

Automation and robotics: Companies won’t accept higher costs without a struggle, says Mark Zandi, chief economist at Moody’s Analytics. ‘They will attempt to make even greater use of automation – 3D printing, artificial intelligence and robotics. As a result, don’t expect the great return of well-paid jobs that Trump or other protectionists promise.’

Lobbying: If companies feel less able to rely on trade deals for market access, they may seek more individual concessions from governments. ‘The instinct of many chief executives will be to cosy up to politicians and try to negotiate separate deals,’ says Zandi. This view is seconded by Ikenson. ‘Businesses will be investing more in influencing politicians,’ he adds.

A final and more overarching possibility, some free trade advocates argue, is a broadly lower level of corporate investment. ‘Worries over trade are creating an enormous amount of uncertainty,’ says Zandi. ‘It may be one of the reasons that investment has been especially weak recently and it is possible that many businesses will freeze large investments until they have greater clarity.’

Christopher Fitzgerald and Fernando Florez, journalists