Investors are anxiously awaiting more details on the new US
Administration’s economic policies and priorities. Part of the
challenge is that the cabinet represents a wide range of views and it is not
clear where the informal power lies, or whose call is it. In terms of
economic policy, trade is being given priority. It is seen as
the key to the jobs and growth objectives.
There have been two initiatives: formally withdrawing for the
Trans-Pacific Partnership and indicating a desire to re-open NAFTA.
Neither one is surprising, but will likely nevertheless have far-reaching
ramifications. In the previous administration, the two issues were tied
together. NAFTA was understood to need updating, but rather than re-open
negotiations per se, Obama opted to include Canada and Mexico into the TPP would supplant NAFTA. For the Trump
Administration, not participating in TPP, exposures a greater importance of
re-opening NAFTA.
Asia.” It was a case of the flag following the trade. For more than 30-years, more goods cross that
Pacific than the Atlantic. Without TPP, the economic compliment, the
pivot to Asia take on a more militaristic tenor, which concerns China as a new form of containment. The Great Graphic
posted here is from Cato
Institute economists and depicts US trade with TPP
countries. In fairness, none of the last three candidates for
President (Trump, Clinton, and Sanders)
supported TPP. Australia and Japan are pushing to keep TPP without the
US, which is possible. It is also still possible that Trump negotiates a
bilateral free-trade agreement with Japan.
Many investors and economists do not seem to recognize the importance of
NAFTA. The trade that is
covered by the agreement accounts for almost a third of US trade, or roughly $1
trillion. In comparison, China is about a
sixth and the UK, which appears to be
moving higher in the queue under in the Trump Administration, accounts for a
tenth of US trade.
The auto sector has been a bit of a lightening rod for the new
Administration. Industry figures suggest that Mexican-made vehicles are made of about 40% American parts on
average. The US exported about $22 bln in vehicle parts to Canada in 2015
and $20 bln to Mexico. About 12% of US-made care are from Mexican
parts. A little over half of Mexican-made cars are exported to the US. GM, Ford, and Chrysler account
for almost half of Mexico’s light vehicle production.
President Trump seems to prefer bilateral agreements rather than the
large multilateral deals, like TPP. New bilateral agreements
could replace NAFTA, but a key element for the new Administration may be the
domestic content rules. Also, some
like Commerce Secretary Ross is also concerned about the VAT that Mexico has
lifted from 10% to 16%, and which is deductible for exporters. Ross has
argued this discourages exports and encourages manufacturers to build
production facilities in Mexico.
We have argued that for historical reasons US companies pursued a direct
investment strategy over the more traditional export drive. The
dollar was very strong under Bretton Woods, and as countries rebuilt after
WWII, direct investment was a way around protectionism. Under the
floating exchange rate period, direct investment was also embraced as a way to insulate companies from the new
volatility of currencies. If the
Trump Administration is going to discourage the direct investment strategy,
Corporate America will be undergoing a more dramatic re-orientation than many
seem to realize.