In this post, we return to a theme we revisit from time to time: the
divergence of America’s policy path from the rest of the world. In the
post-war period, free trade has become something of a sacred cow in the
economics profession. Few challenge its benefits, and almost all – at least
theoretically – support the unhindered movement of goods and services
across national borders.
Of course, in practice, global trade doesn’t always happen in a
frictionless fashion. But the so-called “comparative advantages” of each
nation (where countries focus on their industry specialties and lower
opportunity costs) support the theory that international trading partners
are best served without trade restrictions. Each country plays by the same
rules, fairness is upheld, and overall global economic welfare is improved.
Yet this decades-old orthodoxy is now under siege. The resignation in early
March of Trump’s top economic adviser, Gary Cohn, dealt a big blow to
free-trade proponents inside the White House. Not many are left – certainly
none as prominent as Cohn had been – to defend the economic establishment.
The main danger is that the rules may now be re-written, with the world
moving from an era of liberal trade and open markets to one of growing
protectionism. Full-blown protectionist policies in the U.S. (i.e.,
imposing tariffs, threatening to tear up trade agreements, and other
unilateral actions) would not only be unprecedented in the post-war era,
but would undoubtedly prompt retaliation from other nations and convince
the world that the existing global trading system is unravelling. Such was
the tenor of the tit-for-tat exchanges last month when President Trump
announced the imposition of tariffs on Canadian and Mexican steel and
aluminum, both of which countries had been granted temporary exemption.
If the shift continues, it would mark the largest and most dangerous change
in economic thought and order in decades. Larry Kudlow, Trump’s recent
appointment for director of the National Economic Council, has even
identified the counterproductive nature of recent tariff action, referring
to them wryly as “sanctions on our own country.”
On the one hand, you cannot blame the U.S. for acting in its own best
interests. Trump has rightly identified some deep inequities in world
trade. But the U.S. foray into protectionism will almost certainly be a
pyrrhic victory. In a globalized world defined by a move toward closer
interconnectedness, the “biggest loser” would be the U.S.
Chinese President Xi Jinping, who has worked steadily over the past four
years to strengthen China’s position in Asia, likely views Trump’s retreat
from globalization as his own triumph. Consider former President Obama’s
“pivot to Asia,” with the Trans-Pacific Partnership being the centerpiece.
It is now dead. That leaves Xi’s “Belt-and-Road” strategy (his own version
of “Make China Great Again”) as the uncontested blueprint for future
economic integration in Asia.
Ironically, China’s diplomacy now also offers a positive vision. In Davos
last year, President Xi (a first-time visit for any Chinese president)
defended globalization, positioned his country as a protector of free
trade, and urged policymakers to “just say no” to protectionism. “Pursuing
protectionism is just like locking one’s self in a dark room. Wind and rain
may be kept outside, but so are light and air,” he said during his address.
“No one will emerge as a winner in a trade war.”
In Europe, Emmanuel Macron’s presidential victory, with his La République en Marche party securing a record parliamentary
majority, was won on a platform of pro-globalization, pro-free trade, and,
importantly, potential federal solutions to the European Union’s (EU’s)
structural problems (which could renew a cooperative Franco-German axis
that had driven the EU project since the early 1950s). That contrasts
starkly with Trump’s “America first” agenda, whereby the U.S. effectively
withdraws as global country leader. Expect other leadership to continue to
fill the hegemonic void left by U.S. nationalistic policies.
All may be fair in love and trade wars, but will the President Trump
actually carry out extreme protectionist policies? The knee-jerk reaction
may be to answer yes. After all, the President does have broad legal powers
to restrict international trade, and he has already imposed tariffs on
steel and aluminum (now including Canada and Mexico). And he’s shown no
shortage of enthusiasm for trade brinksmanship.
Yet, several reasons suggest that Trump’s bark will be bigger than his
bite. In the week where the first round of tariffs were delivered, Cohn
resigned, and a huge public backlash emerged from at least half the
Republican caucus in Congress. Corporate leaders also issued sharp rebukes
against trade protectionism. It is also becoming clear that the President
is curiously trying to protect a world that no longer exists – the
manufacturing and industrial economy of the U.S. is long gone.
Most importantly, U.S. trade law provides an almost infinite range of
possible policies. The Trump administration could easily take several trade
measures that would draw huge headlines and appease supporters, but would
not have a material impact on overall trade volumes (much as the Obama
administration did with its aggressive pursuit of anti-dumping and WTO
cases against China). Although this seems the most probable scenario, we
continue to closely monitor risks.
Looking ahead, America’s waning leadership should contribute to the
underperformance of U.S. equities relative to global indices. Since 2009,
America’s stocks and its currency have trounced their global counterparts.
From its low in 2009, the MSCI U.S. index has risen by roughly 400%, while
the MSCI All Country World ex-U.S. index has risen by only slightly more
than half as much.
However, we have argued in the past that U.S. equities are set to
underperform. Three key drivers of U.S. equity outperformance are going
1. In recent years the Fed was the most aggressive liquidity provider in
the world – this is no longer the case. The Fed is now tightening, while
almost everyone else is on hold.
2. In recent years the U.S. benefitted from an extraordinarily competitive
currency – this is no longer the case. In a very short period, the U.S.
dollar has gone from being significantly undervalued against almost all
currencies, to being fairly valued against most, to now being overvalued
against the likes of the euro and the yen.
3. In recent years U.S. equities were attractively priced – this is no
longer the case. Where may the next phase of outperformance direct itself?
Europe and Asia are the most likely candidates – regions that generally
have cheap currencies, are showing signs of earnings and economic
acceleration, and trade on much lower valuations. Who can argue with
rotating into less expensive markets, where business cycles have only just
begun their expansion phases, where profits have plenty of scope for
improvement, and where monetary policy is years away from any substantial
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in Forstrong’s
Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
firstname.lastname@example.org. Follow Tyler on Twitter at
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