7 June 2018

The Importance of the US Export Market and Fears of a Trade War

Since the Second World War, the United States has not only been the world’s largest economy by a wide margin, but it was also the country that did more than any other to promote international trade and investment.  Furthermore, given its tremendous economic power, it was the United States that set most of the standards upon which the post-war global economy was based.  With the US Navy’s domination of the world’s oceans nearly absolute, it was also the United States that guaranteed and protected the world’s great shipping lanes, allowing for trade and investment to flourish on a scale never seen before.  Furthermore, the US, as the leader of the capitalist world during the Cold War, protected the world’s other leading economies from external threats, allowing them to rebuild and flourish in the decades after the devastation caused by the Second World War. 

Today, the United States remains the world’s leading economic and military power by a large margin, but its commitment to protecting global trade and investment appears to be waning.  The policies enacted by the Trump Administration during its first 17 months in office have signaled a major reduction in the United States’ willingness to promote and protect global trade and investment unless it perceives there to be a direct benefit to the US on a case-by-case basis.  Furthermore, isolationist and nationalist policies are gaining support, not only in the United States, but it many of the world’s leading economies.  As a result, the United States and many other large economies are now less committed to an inter-connected global economy than at any time since the 1930s.  Worse, the US and some other major economies are not only lessening their support for open trade and investment, but are also moving to enact new barriers to trade, investment and the flow of labor.  These developments could lead to a domino effect in which country after country feels compelled to protect their own domestic economies in the face of rising barriers to trade and investment elsewhere, something that could cause massive damage to an already-fragile global economy.

One of the reasons why the recent protectionist measures enacted by the Trump Administration have caused so much consternation around the world is that the United States remains the world’s leading market for exporters.  Even with the rise of emerging markets in Asia and other regions, the US remains the largest export market for many of the world’s most successful exporting economies and businesses.  This is due to a number of factors.  First, the United States market remains the largest in the world, and will remain so until China eventually overtakes it, likely sometime in the coming decade.  Second, US consumers are among the wealthiest in the world, with disposable income levels in the United States remaining much higher than those of most other developed economies in Europe or Asia.  Third, the US market continues to expand at a faster pace than most other developed markets, offering growth opportunities that most developed markets in Europe or Asia cannot offer.  As a result, the United States market will remain one of the key markets for exporting countries and businesses for the foreseeable future, making fair access to that market a priority for exporters. 

It is this fair access to the vast United States market that exporters are now concerned will be eroded by the policies of the Trump Administration.  The threat of tariffs on Chinese imports and the recent tariffs placed on steel and aluminum imports into the US are seen by some as just the tip of the iceberg when it comes to protectionist measures being threatened by the US government.  In fact, while the Trump Administration has focused many of its efforts on reducing the United States’ large trade deficit, many of the countries that will be impacted by these trade barriers are the US’ closest political and economic allies.

Should the US continue to raise trade barriers, the impact on other countries will vary greatly.  Clearly, it is the United States’ trade partners in North America that are most at risk.  For example, more than three-quarters of Mexico’s and Canada’s total exports are destined for the United States, making these two countries completely reliant upon the US market for much of their growth.  Furthermore, Mexico, Canada and other countries in the region have little option but to fight to maintain their access to the US market, as there is little chance for them to offset losses in the US with gains elsewhere.  This holds true for the countries of Central America and the Caribbean as well, as access to the US market is the key to their future economic success.  Further south, most South American economies are less dependent upon the US market, but nevertheless, any loss of access to the US market would be a major blow for a region that has struggled mightily in recent years.

Access to the United States market has been one of, if not the, key factor in the Asian economic miracle of the past few decades.  Japan, South Korea, China and other countries in that region based their economic development on their ability to export manufactured goods to the US market, enabling the region to record the greatest reduction in poverty in human history.  Even today, the United States market remains the first- or second-largest export market for nearly every major economy in Asia, and access to this market is a key to preventing many countries in this region from becoming more reliant upon China and its fast-growing export market. 

Of all of the regions that have been impacted by the recent protectionist policies in the United States, it has been Europe that has reacted with the most anger and frustration, even as the US is not the leading export market for most European economies.  However, many of Europe’s leading economies are among the world’s most export-dependent countries and they know that, should the moves by the US lead to trade barriers going up around the world, their economic futures will be in grave jeopardy.  As such, Europe will likely move strongly to prevent the spread of protectionist policies in order to prevent what would be a devastating blow to a region that has just recently pulled out of a series of major economic crises.

Given the style of governing by the Trump Administration, it is hard to predict its future moves with regards to trade policy.  For some, President Trump is using the threat of trade barriers as a negotiating tactics, reasoning that, given the vast scale of the US market, he can force the US’ trade partners to give favorable terms to the United States when negotiating new trade deals.  For others, there is a view that the US president’s actions are an attempt to punish those countries that he believes have unfairly benefitted from unfettered access to the US market and from US protection of key markets and shipping lanes. 

The next development to watch will be the third move in these current trade disputes.  The first move was the United States’ threatening and implementing new trade barriers, such as the recently-enacted tariffs on steel and aluminum imports.  The second moves, some of which are now being considered, are the responses by those countries impacted by these new trade barriers.  These are likely to have already been taken into consideration by the US when it enacted the initial barriers.  The key will be the third move, or the reaction of the US when its trade partners enact barriers to counter the US’ initial tariffs.  Should the US react by adding even more trade barriers, the prospects for a full-blown global trade war will rise sharply.  Should the US refrain from such actions, then these disputes are likely to be resolved over time.  As a result, the decisions taken in Washington and other global capitals in the coming months will go a long way towards determining the health of the global economy for years to come.  Unfortunately, a full-blown trade war cannot be ruled out and this will keep tensions high for countries and businesses around the world.