Let’s Talk about Trade
Trade policies are not a sexy business. Customs, anti-dumping, subsidies are just some of the concepts international investors are trying to avoid. Yet, recent weeks reminded all of us that trade can make headlines. And make or break industries around the globe. The subsidies to the aerospace industry in the EU and USA, the limitations on Indian cotton, and the World Trade Organization, or WTO, claims against China by the US, Europe, and Japan for export control of rare earth metals all have a dramatic impact on the respective industries. We cannot avoid them.
How should we explain the recent hyper-activity in this area? And what are the ramifications?
First, it is important to understand the story in light of the trade-investment nexus. The foreign investment boom of the 80’s and 90’s replaced global trade as ‘the’ economic engine, with global trade being au-courant post- World War II. While the world saw a quadrupling of trade in goods between 1980 and 2008, before the global financial crisis, global investment has risen more dramatically. Global stock of outward investment, for example, grew from $550 billion in 1980 to almost $19 trillion at the end of 2009.
The years since the global financial crisis of 2008 have reversed this trend. Credit crunch, a slowdown in mergers and acquisitions activity, lack of faith in the future of globalization, and regulatory reforms – all made it ever more challenging for multinational corporations to do business abroad through foreign investment and their subsidiaries. Hence, trade is becoming a crucial element of the ‘new globalization’ and its policies even more so. Moreover, since emerging markets are the real forces behind the current recovery post-financial crisis and the developed world has traditionally led cross-border investments, it is clear why emerging markets’ exports and trade policies towards them are critical.
Second, trade legislation and disputes are clearly a reflection of foreign relations and protectionist sentiment. Lack of trust and economic competition make even right wing governments think that certain market-based trade policies should be reconsidered. Recent disputes in India can exemplify that.
Third, this is a big year for those who follow the link between politics and economics. France, United States, and several other developed markets are going to the polls. We tend to think about general elections as an internal event with external consequences. In other words, the nation decides on its political and economic future but it is the international community and global markets that pay part of the price.
Yet, watching the current elections’ campaigns carefully it seems like the trend is reversed. These elections become an external affair with internal consequences, at least when it comes to trade, foreign investment and growth.
Foreign investment traditionally attracts very little attention in elections season. Speaking about the need to bring foreign investors is usually perceived as a threat to local industries and a trigger for unemployment. Additionally, investors would shy away from markets that may experience a political change with a potential impact on foreign investors. French candidate, Francois Hollande, for example, is talking about taxing high the super rich (75%) and increasing local subsidies. Some investors interpret his policies as anti-foreign investment. This kind of talk is risky. Trade, however, allows politicians to communicate to their voters without risking their standing vis-à-vis the global investment community and their supporters. Obama’s active participation in the fight against China in the WTO is a case in point.
Finally, this dramatic shift that I describe is a reflection of the broader agenda of the WTO. A decade ago, when world leaders met in Cancun to negotiate trade agreements as part of the Doha Round, also known as the development round, any attempt to include non-core topics with trade impact, such as investment or trade facilitation, failed. These topics, the “Singapore Issues”, have been perceived as a barrier to trade negotiations. Recently, however, politicians and trade negotiators refer to the WTO as a weapon of last resort for dealing with strategic macroeconomic disputes, such as the old-new currency wars. While formal international institutions were part of the problem just a few years ago, now the world is looking at them as the solution.
While investors will have to watch trade policies and disputes more carefully, it will also require them to develop the know-how to understand the essence of the policies and their impact on markets. The next decade will look differently.
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