Global trade stalls while protectionism expands: Are you ready for a trade war?

Global trade is slowing and protectionism is growing. Trump and Clinton will make it worse. Are you ready for a trade war?

In October, our newsletter sent up a warning flag that growth in global trade seemed to be slowing down.

Now, it appears the growth in global trade has stopped.

Export-Growth-EconMinute

 

In the U.S., it’s even worse. As shown in the figure above, U.S. exports have decreased by 4 percent over the past year. That’s a reduction of $95 billion.

Recent research finds world export volumes peaked and flattened in early 2015. The same finding holds for import volume and for total volume (export plus import). In other words, no matter how you measure it, world trade has come to a standstill. And, it’s a worldwide halt in trade growth. Both industrialized countries’ and emerging markets’ trade volumes have stalled.

So what?

Trade is a big deal and it boosts the U.S. economy. Yes, even trade with Mexico. Yes, even trade with China. Strong exports did more to pull the economy out recession than $830 billion stimulus blowout.

In 1960, 20 percent of homes in the U.S. didn’t have a phone and no one had a cell phone. Today, even the homeless have mobile phones. One big reason is trade that has driven down the price have having a phone.

As trade improves incomes in China, India, and other developing countries, that money will be spent on imports from the U.S. By 2020, per capita income in China is projected be $6,000 higher than today. That’s a billion or more people with huge increases in purchasing power.

There’s a national security component, too. Evidence is building that that the more trading partners a country has, the less likely it will be to engage in a war. That was the entire basis for the European Economic Community, which morphed into the EU.

Who’s to blame?

Research indicates protectionism is a big reason for stagnating trade. Across the world, countries have adopted policy initiatives harming foreign commercial interests. In recent years, protectionist measures outnumbered free trade measures by a 3-to-1 margin.

In the U.S., both Clinton and Trump have campaigned on anti-trade issues. Both Trump and Clinton have openly opposed the Trans-Pacific Partnership.

  • Trump says he’s against “bad trade deals,” but hasn’t named a trade deal that he think’s is “good.”
  • Clinton once praised TPP as the “gold standard” of trade deals, but has since reversed her position.

While we can never predict what will happen once Trump or Clinton enter the White House, it’s clear that pro-growth trade policies are not a priority for either Trump or Clinton.

There’s an old saying that protectionism is a politician’s delight: It delivers clear benefits to those that are protected, while spreading the costs across the public. In this way, protectionism is one of the worst forms of cronyism. Cronies can always get trade deals while the unconnected sit on the sidelines. Be prepared for a short list of winners and a long list of losers as world trade dries up.

The challenge to business, your business: How to make money in the age of protectionism, if you’re not a crony?

If you’re an importer, line up suppliers who won’t be subject to onerous trade rules. Or, set up a U.S. subsidiary who can technically satisfy the new rules. Yes, it’s a pain.

If you’re an exporter, find strategic partnerships in the countries with why you do business. A joint-venture with a local partner (such as a distributor), may allow you to satisfy “local content” rules without providing actual local content.

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