To what extent will US president-elect Donald Trump follow up on his campaign promises to introduce greater trade protectionism? That is a big question for many investors in Asia – and for regulators too, it seems.
Yesterday Ravi Menon, the head of the Monetary Authority of Singapore, Ravi Menon, voiced his concerns on the matter at the UBS Wealth Insights conference in the city state.
“A rise in trade protectionism and, more broadly, a pushback against globalisation can seriously undermine growth prospects not just in 2017 but also over the medium term,” he said.
This is a widely held view. But the fact that the managing director of Singapore’s typically low-profile markets regulator and de facto central bank publicly expressed it is an indicator of the level of concern being felt.
Menon pointed to “the big unknown: the future of global trade and economic integration”.
Trade has been facing a combination of structural and cyclical headwinds since the global financial crisis, he said. These include the fact that the global merchandise trade-to-income ratio has stagnated since 2010, and that China’s import of intermediate goods – those used for the production of other goods – is growing at below 10%, compared to more than 20% in the early 2000s, creating a drag along supply chains across Asia.
This is partly cyclical, reflecting slower growth in China, argued Menon. But it is also structural – reflecting a reconfiguration of supply chains and the mainland increasing insourcing of intermediate inputs.
“As if these cyclical and structural headwinds are not enough,” he added, “we are now facing the uncertain prospect of policy measures against free trade, especially in the US.”
He pointed to Trump's mooted plans to abandon the Trans-Pacific Partnership and renegotiate or even repeal the North American Free Trade Agreement and other international pacts. Menon also highlighted the president-elect's desire both to impose a border tax adjustment that would in effect put corporate tax rate on imports, and to label major trade partners as currency manipulators and impose hefty tariffs on them.
“Some of these actions may well attract retaliatory measures,” said Menon, “leading to trade conflicts with disastrous consequences for the global economy.”
That said, the likelihood is that the worst may not happen, he noted, given a strong belief in various arms of the US establishment in the benefits of an open global trading system and the risks of punitive trade restrictions.
But even limited anti-trade measures, such as targeted tariffs on selected products or industries, could spread through global supply chains and dampen growth in trade flows, argued Menon. “They could even backfire on the US, given how integrated production networks are across countries.
“In short, the growth spillover from the US to the rest of the world will depend on the balance between fiscal stimulus on the one hand, and financial tightening and trade restrictions on the other. The current consensus is that the former will outweigh the latter. We will have to see.”