A shift in U.S. trade policy

David Joy, Chief Market Strategist, Ameriprise Financial

October 2017

Key Points

  • The Trump administration is steering a new course on trade policy
  • The U.S. is pulling back on previous trade agreements
  • This transformation is likely to have both economic and investment implications

On his first day in office, President Trump withdrew the U.S. from the Trans-Pacific Partnership, a trade agreement under negotiation since 2008 among twelve Pacific rim countries representing roughly 40% of world GDP. Although the agreement had not been ratified by Congress, the president’s action followed through on a campaign promise and launched a significant shift in U.S. trade policy. The administration’s 2017 Trade Policy Agenda states, “We find that in too many instances Americans have been put at an unfair disadvantage in global markets…It is time for a new trade policy.”

The new administration’s approach emphasizes bilateral agreements, or those between two countries, rather than multilateral agreements among many countries.

The new trade agenda in action

The administration is aggressively pursuing its trade strategy. Negotiations are currently underway with Canada and Mexico, our second and third biggest trade partners after China. This could alter the North American Free Trade Agreement (NAFTA), in place since 1994.

The President has also directed the U.S. Trade Representative to determine if an investigation of China’s trade practices and intellectual property theft is needed. He has called for tariffs on imported steel, particularly from China, to counter what are seen as unfair pricing practices.

Other initiatives include:

  • Reexamining the provisions of the U.S. - Korea Free Trade Agreement
  • Accelerating bilateral trade discussions with Japan
  • Preliminary discussions regarding a trade deal with the United Kingdom as it exits the European Union (A proposed U.S. - EU trade agreement on the table since 2013 is on hold.)

How trade impacts our economy

While our economy is not as dependent on trade as many others, it still plays a vital role. According to the Census Bureau the dollar value of the trade of goods and services for the U.S., both exports and imports, totaled $4.9 trillion in 2016, more than a quarter of the country’s total economic activity.

An ongoing concern is a persistent trade deficit, which totaled $505 billion in 2016. The country with which the U.S. has the largest trade deficit in goods is China, which last year totaled $347B, or roughly 40% of the total. In second place was Japan, with which the deficit was $69B, followed by Germany at $65B.

A shift in U.S. trade policy

trade policy, effects of globalization

The shifting tides of trade

The pace of international trade accelerated sharply in the years following World War II and is widely credited with expanding economic opportunities and lifting millions from poverty. While the economic fortunes of developing economies have been enhanced by the forces of globalization, it has also contributed to the relative decline of the U.S. middle class.

As jobs moved overseas, wages stagnated, and income inequality and social mobility worsened. Frustration with these economic forces manifested itself politically, contributing to the Brexit vote in the U.K. and to the election of President Trump.

There is evidence that the forces of globalization are beginning to stall. That may be welcome news to proponents of protectionism, but it raises concerns among proponents of a more liberal world economic order. In its 2016 World Economic Outlook the International Monetary Fund pointed out that “The volume of world trade in goods and services has grown by just over 3% a year since 2012, less than half the average rate of expansion during the previous three decades.”

Considerations for investors

The implications for investors of the evolving global trade picture remain uncertain. The devil is in the details of any renegotiated trade provisions in terms of the impact on particular industries and companies.

Some anticipate that multi-national corporations may be negatively affected if these trends continue, while it may create a more favorable outlook for smaller, domestically oriented companies and industries.

A major concern is a lesson that history has warned us about before – rising trade frictions can lead not only to declining economic activity, but escalating political tensions as well.

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