2017 Preview: Despite Trump and Brexit, opportunities for trade persist

2017 Preview: Despite Trump and Brexit, opportunities for trade persist

Brexit and Donald Trump’s election as U.S President do not bode well for global trade in 2017. However, led by China, some emerging markets may have the potential to drive free-trade forward and could even benefit from the backlash against globalisation in the US and the UK.

The first month of 2017 has seen a free-trade sceptic inaugurated as leader of the world’s largest economy. Donald Trump’s remarks during and after his election seem to suggest that the U.S is likely to turn its back on globalisation. One of his first actions since his inauguration has been to sign an executive order which will result in the U.S withdrawing from the Trans Pacific Partnership (TPP) and seek to re-jig the North American Free Trade Agreement in Washington’s favour. Consequently, the free-trade baton could pass from developed countries to emerging markets this year.

Less than 48 hours before President Trump’s inauguration, the first direct freight train from Beijing arrived in London. The train, which is called “East Wind” may see new winds driving global trade.

This year, for the first time, a Chinese head of state attended the World Economic Forum in Davos. At the summit, President Xi Jinping stated that “no one would emerge as a winner in a global trade war.” This seems to suggest that China at any rate, is ready to take on the mantle of fostering trade.

A silver lining for global trade?

Indeed, in some ways, the populist movements in the U.S and the UK may open new ‘silk roads’ for China and other emerging markets. One of the arguments cited by Brexit-supporters when they campaigned for the UK to leave the EU was that it would be easier for the UK to reach new free-trade agreements on its own. If the UK goes to the “back of the queue” once Article 50 is triggered, it may turn to emerging markets such as China to make up for the loss of unrestricted access to the EU’s single market. A recent Financial Times article suggested that Prime Minister Theresa May could be planning a trip to China to discuss trade.

Prior to Trump’s inauguration other observers have suggested that China stood to gain if the U.S walked away from the TPP. Together with America, the countries involved in the TPP account for approximately 40% of the world’s GDP. However, this agreement excluded China. Without American involvement, China may now put its weight behind the Regional Comprehensive Economic Partnership (RCEP) – an agreement which involves ASEAN nations and other Asian giants such as Japan and India. Hence, in Asia at least, China could take its place at the front of the globalising pack. Moreover, Russia could also take a keen interest in signing trade agreements with Asian economies as it tries to reduce its reliance on oil exports to Europe.

Tiger rising

However, regional rivalries may limit the extent to which Asian countries and Russia can establish close economic links. Nevertheless, one contestant – India – may soon find new avenues opening up. Like China, India could be a potential beneficiary of the UK’s vote against EU membership. The UK has also expressed interest in having a free-trade agreement with India – the two countries may have plenty of common ground if they succeed in hammering out the details. For instance, the UK’s major export is financial services and the penetration rate of financial services in India is low.

Moreover, India needs to rebalance its economy – the government hopes the “Make in India” campaign will increase the contribution of the manufacturing sector to national growth. However, for this, India first needs to build up its infrastructure, which may entail more commodity imports. Hence, India could benefit by reaching out to sign trade agreements with commodity-exporters.

South of the border

This would be a bonus to countries in Latin America who stand to suffer from lower commodity demand as China rebalances its economy away from infrastructure investments. However, these countries may reach out to China in other ways, especially if the U.S goes down the protectionist route. Like China, Mexico has been on the receiving end of Trump’s criticisms over trade. Both countries are seeking to forge closer economic ties to offset the negative effects of trade barriers that could arise under Trump. Hence, China and Latin American countries such as Mexico may also succeed in signing free-trade agreements and reducing their dependence on trade with the US.

Furthermore, there may be favourable prospects for Mexico in its immediate neighbourhood. Mexico is a member of the Pacific Alliance – a trade bloc that currently includes Chile, Colombia and Peru and may soon involve Argentina. French President Francois Hollande recently expressed an interest in closer trading ties between this bloc and the EU.

While the world’s largest economy appears to be turning its back on globalisation, emerging markets appear to be in favour of finding their own ‘Silk Roads’ through new free-trade agreements.

Categories: Economics, International

About Author

Nandini Rao

Nandini has a Masters in Financial Economics from Saïd Business School, University of Oxford and a BSc (Honours) in Economics from Aston University. She focuses on monetary policy.