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 One of the most striking aspects of the election campaign is the way
in which Donald Trump and Bernie Sanders are attracting support by
attacking trade deals they see as robbing Americans of jobs and
wages on unfair terms.
Not only has Trump called for a 45 percent tariff on all imports
from China, but Bernie Sanders, speaking Sunday at a debate in
Flint, Michigan, said current trade policy was responsible for “Not
only job loss by the millions, but a race to the bottom so that new
jobs in manufacturing in some cases pay 50 percent less than they
did 20 years ago. How stupid is that trade policy?”
Even Hillary Clinton sounded very little like an advocate of free
trade in Flint, stressing that she’d voted against the only trade
pact to come to a vote in her time in the Senate and had come out
against the proposed Trans-Pacific Partnership agreement. To put
this sea-change in perspective: Clinton, in 2012 as Secretary of
State, called the then-embryonic TPP the “gold standard in trade
agreements.”
Discount all this as you see fit as election rhetoric, or as
unlikely to come to fruition, but the fact remains that the
conversation in the U.S. about the benefits of unrestricted trade
has changed. Whoever wins the White House, or seeks national office
is likely in future to be more willing to impose barriers to trade
and less secure in their ability to argue for lower tariffs and more
open trade.
Indeed, it is perhaps no coincidence that the U.S. last week slapped
a 266 percent tariff on some imports of steel products from China
and a lower levy on six other countries.
There are any number of economic consequences of this, including
potentially lower, though more equally shared, economic growth, but
one stands out as an easy call: trade barriers are inflationary. The
erosion of the longstanding, broad, cross-party consensus on trade
is a big deal, and perhaps a very inflationary one.
Imposing tariffs on imported goods sets off a classic kind of
cost-push inflation in which the inputs of a good, such as parts,
materials and labor, rise in price and prompt rising prices.
Good or bad, just or unjust it may be, but a U.S. which is more
willing to build moats and walls around its economy is one which,
all else being equal, will have more inflation.
GLOBAL IMPACT
And of course, trade is a relationship rather than something one
side dictates, and if the world’s consumer of last resort is raising
tariffs you can expect others to do so as well, theoretically
sparking inflation elsewhere.
Falling inflation and bouts of deflation have roughly paralleled the
huge increase in global trade which came as China was, and other
emerging markets were effectively, integrated into the global
economy. That fall in inflation might have other causes, notably the
aging of populations in developed economies, but offshoring of
manufacturing also played a role in driving down the price of
manufactured goods like electronics, clothing and even some food.
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This global competition has global impact, keeping a lid on price
rises in emerging markets and developed economies alike. It is
striking the way in which tariffs have declined along with global
inflation in recent decades. Average world tariff rates were 30
percent in the early 1980s, spiking as high as 40 percent in the
early 1990s and then steadily declining to roughly 6 percent by
2010, according to World Bank-derived data. Global inflation traced
a similar path, from as high as 30 percent in the 1990s to about 3.3
percent today.
A rekindling of tariffs, much less trade wars, would likely drive
inflation higher while doing it in a way that is negative for
growth. This will be an extremely unpleasant puzzle for central
banks to solve, making the current search for inflation seem simple
and risk-free in comparison. At the very least you can expect
increased political pressure on central banks.
While this scenario would be bad for bonds, which fall in value as
interest rates rise, it is also no picnic for stocks.
Trade policy as it has been practiced over the past 30 years has
been asymmetrically positive for corporate profits for
multinationals which can move production and build a global supply
chain. Less of the economy goes to labor and companies have often
been good at gaming the system to protect themselves, and their
profit margins, from competition. Look for falling margins and
rising wages, all with higher rates as a backdrop.
Could be tough times ahead for investors.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be an
owner indirectly as an investor in a fund. You can email him at
jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
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