One of the most contentious US presidential elections in recent history was decided this week as the people chose Donald Trump as the 45th President of the US. A prominent businessman and one who is considered a political “outsider”, the election results sent shock waves around the world. What it means for global trade is still uncertain but based on campaign rhetoric a Trump presidency could put the brakes on trade with the US’ closest trade partners and globalization in general.
“NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country,” – Donald Trump, Presidential Debate, September 26
NAFTA became law in 1994 under President Clinton and it eliminated almost all taxes on goods sent between the US, Canada and Mexico. NAFTA has often been blamed for US manufacturing job losses. There are indeed less people working in US manufacturing today versus 1994 according to the US Labor Department; but the blame cannot be placed only on NAFTA. Technology has made considerable advancements and today American manufacturers are more productive than they were in 2000. Adjusted for inflation, U.S. manufacturing output totaled $5.90 trillion in 2000. In 2015 it was $5.94 trillion with fewer workers.
Not just US manufacturers have opened facilities in Mexico to take advantage of NAFTA benefits. For example, after the horrific earthquake and tsunami hit Japan in 2010, Japanese automakers opened facilities in Mexico to reduce supply chain risk.
What will become of NAFTA is unknown; it could be scrapped altogether or revised. In 2015 while seeking the Republican nomination, Mr. Trump suggested implementing a 15% to 35% tax on Mexican imports. While the focus has been on Mexico, the US’ third largest trade partner little has been said of Canada, the US’ second largest trade partner and also part of NAFTA.
“We need fair trade. Not free trade” – Donald Trump, 60 Minutes interview, 2015
Throughout the campaign, free trade agreements came under fire by both candidates. In fact, not only did Mr. Trump express concerns over the Trans-Pacific Partnership agreement but Ms. Clinton did as well citing that it would hurt US workers. The agreement is designed to promote trade and strengthen the relationships between 12 nations by reducing and eliminating tariffs, encouraging competition, and creating greater opportunities for businesses.
On the other hand, little has been said regarding the Transatlantic Trade and Investment Partnership however it is likely that it too will be scrutinized further. The on-again, off-again negotiations between the EU and the US have raised questions if the potential agreement is ‘dead in the waters’ but all sides insist it isn’t and that there still many moving parts that need to be hammered out. It was hoped that the two agreements would have been approved and signed before the current President left office but it now appears that President-elect Trump will inherit both.
Protecting the US worker also seems to include a hefty import tariff on Chinese exports to the US with Mr. Trump suggesting a 45% tax according to the New York Times. In fact, imposing more tariffs seems to be a preference of Mr. Trump dating back to the 2011 publication of his book, Time to Get Tough, in which he proposed a 20% tax on imported goods.
2016 – The Year of Protectionism
The US Election as well as the Brexit decision earlier this year clearly shows a shift towards protectionism. Since the global economic downturn in 2008-09, recovery has been slow and lopsided throughout the world. Combined with advances in technology and increasing global risks, a feeling of unease has spread throughout the world. As such, the results of the US election appear to be a mandate that the country does not wish to play as prominent of a role in global issues as it once did. For example, Mr. Trump has suggested that the US might not fulfill its commitments to defend NATO allies under attack if they did not do more to boost defense spending. In regards to trade, Mr. Trump has hinted that the US could pull out of the World Trade Organization if it challenged a possible NAFTA renegotiation.
The unknown can be scary and this often results in the desire to look for security so it’s not surprising countries are embracing protectionism. But, with that being said, globalization is not dead as many economists fear. Instead, as a result of rising inward-sentiment, it is changing but the result will mean that global trade will become more costly for supply chains.
Subscribe to our newsletter for the latest trends affecting supply chains. Stay tuned, next week we’ll discuss China’s Silk Road initiative and its affects on world trade.
