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February 2017

Investment insights

The inconvenient truth

by Tom Stevenson, Investment Director 
 
There is a glass half full view of the Trump Presidency which has won the majority of investors’ attention since November. It focuses on infrastructure spending, tax reform and deregulation and it can take the credit for the S&P 500 hitting a series of new highs in the wake of last year’s election. 
 
There is also a half-empty assessment and it is this more pessimistic reading which has gained ground during the investment world’s dry January. This view gives more weight to the risks than the opportunities implicit in the Trump approach. The biggest of these is the new President’s long-standing rejection of free trade in favour of an aggressive protectionism.
 
PayPal founder and Trump supporter Peter Thiel said that people should take the President seriously but not literally. Believing him, investors have been happy to accept that wild talk of heavy tariffs on Chinese and Mexican goods was just a metaphor for a saner trade policy. Now they are entertaining the thought that the President might actually mean what he says.
 
No-one should be surprised by Mr Trump’s negativity on trade. The language of his inaugural address may have been forthright but it was not new.  In a recent note exploring the possibility of a US-led trade war, Goldman Sachs put together a useful collection of quotes from the President dating back to the 1980s when he was blaming the Japanese for pretty much everything he lays at the door of the Chinese today.
 
In his 1987 book The Art of the Deal, he said: ‘what’s unfortunate [about the Japanese] is that for decades now they have become wealthier in large measure by screwing the United States with a self-serving trade policy’. Then in 1999 he warned: ‘if other countries aren’t going to treat you fairly….they should suffer the consequences.’
 
No-one should think either that the Trump doctrine really differs from broader US policy since America emerged from the Second World War as the dominant force in the global economy. America has never tolerated a rival to its economic hegemony, squashing threats to its leaderships from, first, the European imperial powers, then the Soviet Union and Japan. China is just the latest rival to find itself in the US’s sights.
 
Trump’s position on trade is misguided for two reasons. First, because its basic assumption that economics is a zero-sum game with equal numbers of winners and losers is wrong. It may be hard to accept this in the hardest-hit parts of America’s rust-belt, but the US has been a significant beneficiary of the globalised, free-trade world order that has prevailed for the past 70 years. Its investment has not been a charitable donation but a far-sighted act of self-interest.
 
It is true that China’s relatively-improved economic position has been staggering over the past 40 years. According to economist Jeffrey Sachs, China’s share of global GDP was 2.3pc in 1980 compared with America’s 21.9pc. Today the equivalent shares are 18.3pc for China and 15.4pc for the US. Measured on a per capita basis, China’s economic output has grown from just 2.4pc of America’s to 39pc over the same period.
 
But that ignores the benefits that have accrued to most Americans during the past 37 years, a period of stability, peace and unprecedented prosperity. Globalisation has not come without its costs but it is wrong to focus exclusively on these and to ignore the real, tangible benefits of America’s engagement with the rest of the world. To pretend that other countries have caused Trump’s ‘American carnage’ is to disregard the facts.
 
It ignores the inconvenient truth that trade with Mexico, for example, is a two-way street. Mexico bought 16pc of America’s exports in 2015. The US has a trade surplus with Mexico in services not a deficit. Something like 40pc of the value added in US imports from Mexico actually originated in America. Many Mexican exporters are owned or controlled by US companies.
Trump’s trade policy is not just misguided, it is also doomed to fail. A trade war with China would have no winners, certainly not America. When the US forced Britain to give up its empire, it was pushing on an open door. We were bust. When it pressurised Japan to revalue its currency in the 1980s, it had the whip hand because Japan was dependent on the US for its military security. The Soviet Union was overstretched militarily and financially. It was a soft target.
 
China, on the other hand, already has a larger economy than the US, its population is four times as large and it still owns $3trn of US debt, even after spending $1trn supporting the yuan over the past couple of years. The Trump administration knows this. Which is why it has so far held back from the most drastic weapons in its trade arsenal. It has not branded China a currency manipulator (despite a campaign promise to do this on day one). It has not yet moved to implement broad-based tariffs. 
 
We should take some reassurance from this restraint. It suggests at least some understanding of the bad economics of trade conflict. Goldman Sachs calculates that the mooted 35pc tariff on Mexican goods and 45pc on those from China would be equivalent to an overall 11pc tariff on all US imports. With a tenth of the US inflation basket linked to imports, such an effective tax would certainly lead to higher inflation and interest rates in America. It would hurt American consumers as much as anyone. If Mexico and China retaliated in kind, US GDP would fall by nearly 1pc by 2019. Boeing estimates that its exports to China support 150,000 US jobs.
 
Putting America First may sound like a good political sound bite in 2017. It may not be so catchy in four years’ time at the next election when America’s global companies are laying off workers and consumer prices are rising. Investors who have pushed the S&P 500 above 2,300 this week may not wait that long to cast their vote.
 

 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

© 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited. 

 

 

This website is intended to provide general information only and has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information and consider the relevant Product Disclosure Statement for any product named on this website before making an investment decision.

© 2017 FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340.
Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL limited.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ("Fidelity Australia"). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision retail investors should seek advice from their financial adviser. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund mentioned in this document. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. © 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, and the Fidelity International logo and F symbol are trademarks of FIL Limited.