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The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’
The trade war dust has yet to settle, and may never under President Donald Trump. But there is no going back to the low tariff world, led by America for much of the post-second world war era. The effective US tariff rate is likely to remain well above 10 per cent, far higher than the 2.5 per cent rate that prevailed until last year. So it is time to start mapping the new, high tariff world.
America’s trade offensive has already created enough doubt among domestic businesses and global investors to radically redirect long-established supply chains and capital flows.
The big losers are likely to be the biggest beneficiaries of globalisation — American multinationals. As barriers to trade and capital fell in recent decades, US corporations increased profits much faster abroad than at home. Profit margins for S&P 500 companies had held steady since the 1960s. Then margins nearly doubled to around 13 per cent after 2000, coinciding with China’s entry into the WTO.
Many US giants generated “supernormal” profits, far higher than their developed world rivals, by cashing in on the appeal of American brands and outsourcing production to nations with the cheapest costs. Today, US multinationals generate more than 40 per cent of their revenue abroad. The biggest gainers were manufacturers, which on average pay their workers overseas 60 per cent less than staff at home.
Now, American businesses will think twice before setting up new factories abroad and decisions will not be driven by the straightforward logic of maximising profitability. The large multinationals in particular will see profit margins under constant pressure.
Amid anger over tariffs, “Made in America” is attracting more controversy than customers. Two in three Germans say they are avoiding US products. Social media campaigners are organising boycotts in Sweden and France. No nation is more irate than Canada, where consumers are switching from US to Japanese whisky, cancelling US streaming services and calling off trips to their southern neighbour.
It is hard to imagine a scenario in which the US emerges as a net winner of these tariff wars even if it achieves some of its objectives, from creating more factory jobs to punishing allegedly unfair trade partners. The drag from higher prices, lower efficiency and damage to its policymaking credibility will outweigh any benefits.
Investors, who had become mesmerised by the extraordinary profitability and growth of the largest US companies, are fast realising the folly of concentrating so much capital in one country. This decade so far, the US has attracted 80 per cent of the money flowing into stock markets worldwide, but those flows are starting to shift. Institutional investors around the world are aggressively paring back their US exposure.
The winners could be emerging powers such as India or Brazil, where a large domestic market accounts for 70 per cent of GDP or more, and provides insulation from trade wars. Former antagonists are coming together to defend the export-led growth model that brought prosperity to regions like east Asia. Japan is talking to South Korea and China about a joint response to Trump’s tariffs. Meanwhile, China and India have made noises about co-operating to blunt the impact of the US offensive.
In Latin America, Brazil is shedding its protectionist impulses, fast-tracking a new deal with Europe and cultivating trade with China. To reduce its imports from the US, China just bought an unusually large amount of Brazilian soyabeans.
The emerging powers are likely to become magnets for capital looking for new homes outside the US. This can start a constructive feedback loop by lowering borrowing costs and funding productive investment, powering economic growth — driving financial markets higher and sucking in more money.
As the trade war intensifies between the US and China, the strategic importance of Europe is increasing as well. Europe can tip the balance in the superpower contest and nations such as Germany have shown that when faced with an existential crisis they can rally to reform.
The conventional wisdom is that when two elephants fight in the jungle, smaller animals get trampled. Not always. Many countries can use the opportunity created by superpower conflict to push domestic economic reform and increase trade with each other. There are signs this is happening, setting the stage for new winners and losers to emerge in this new, high tariff world.
