The new US president is prepared to carry the torch for a shrinking band of globalists, but the growing trend of economic nationalism will prove hard to reverse.
Economic nationalism is not a new phenomenon; it has been rising steadily as sub-par economic performance across much of the developed world following the financial crisis led nation after nation, most notably the US under former President Donald Trump, to turn inwards.
For so long a lynchpin of global growth, international trade’s share of world economic output has stagnated since 2008 as a growing number of companies re-shored supply chains and (more recently) as the US, China and other nations slapped tariffs on each other’s products.
The coronavirus pandemic has reinforced these trends. Ian Pizer, Aviva Investors’ senior strategist, multi-asset & macro, believes the current episode of vaccine nationalism is primarily about the speed of access as countries ramp up vaccine manufacturing capacity. As such, it is likely to be a temporary phenomenon.
Nonetheless, by throwing a spotlight on the perils posed by porous borders, the pandemic is likely to have other, longer-lasting effects. In doing so, it will probably reinforce various trends that pre-date COVID-19.
Most obviously, governments will want to tilt various supply chains towards domestic manufacturers. Beyond vaccines, they could look to build up domestic production capacity for ‘critical products’ to minimise the risk of a repeat of the global supply shortages experienced early on in the pandemic.
Governments will want to tilt various supply chains towards domestic manufacturers
Politicians may be tempted to go further. On February 24, US President Joe Biden signed an executive order in which he stated he wanted to make supply chains “resilient, diverse, and secure” for a host of products, ranging from microchips and electric vehicle batteries to critical minerals and rare-earth elements.1
Significantly, while people may return to relative normality quite quickly (assuming the pandemic is brought under control), government policies towards containing outbreaks could be affected for years to come thanks to the financial scarring inflicted. Greater frequency of border lockdowns is another reason to believe supply chains will become more localised and cross-border trade may suffer.
There are other reasons to believe economic nationalism could intensify. While the global economy is widely expected to grow sharply this year and next, the longer-term outlook is uncertain. Eventually, the huge amounts of fiscal and monetary support that have been offered to economies will need to be withdrawn.
Little thaw in US-China relations
Despite Biden being undoubtedly less bellicose than his predecessor, there seems little prospect of much, if any, thaw in relations between the two main protagonists in the trade hostilities of recent years.
While the US might be open to trade negotiations, it isn’t ready to lift tariffs on Chinese imports soon
On the campaign trail, Biden said Trump’s tariffs were not only hurting US farmers who sold to China, but also consumers and domestic manufacturers who relied on cheap Chinese imports. Yet, on March 4, Commerce Secretary Gina Raimondo described Trump’s 25 per cent levy on foreign steel and ten per cent tariff on aluminium imports as “effective”.2 Later that month, US Trade Representative Katherine Tai said while the US might be open to trade negotiations, it isn’t ready to lift tariffs on Chinese imports soon.3
Much as Biden appears keen to mend fences with the US’s traditional European allies, there appears plenty of scope for tensions to boil over. For example, Europe’s efforts to clamp down on big US technology companies run the risk of retaliatory action, as evidenced by the US warning it could put tariffs of up to 25 per cent on a host of UK exports in retaliation for a UK tax on tech firms.4
Washington recently proposed a new model for taxing multinational corporations, calling for the world’s biggest businesses to pay levies to national governments based on their sales in each country as part of a deal on a global minimum tax. It is unclear how other countries and trade blocs will respond.5
Governments have taken a very active role in their economies throughout COVID-19 to prevent a wave of bankruptcies. They have provided loans to, and bought shares in, some firms, and bailed out others.
In one of the most striking examples, the French government recently said it will contribute up to €4 billion to strengthen Air France-KLM’s balance sheet. This would potentially double its shareholding as it tries to steer the airline through the pandemic.6
It is only natural to expect governments will take measures to protect their interests
Though few would deny governments had little option but to step in to support businesses, the question is to what extent this heralds the beginning of a period of greater state involvement in economies. In March 2020, Trump was keen to stress the US state’s intervention did not mark a government takeover, arguing its purpose was not to “weaken” the free market but to “preserve it”.7
However, while some will reassure themselves this period of government activism will prove temporary, history suggests the state cannot be relied upon to relinquish control. Crises such as this tend to lead to a permanently bigger state with many more powers and responsibilities – as well as the taxes required to pay for them. The welfare state, income tax and nationalisation all grew out of conflict and crisis.
At the same time, fiscal policy is expected to be far more expansionary than in the period that followed the financial crisis. That means governments will almost inevitably hand out sizeable contracts to private sector companies, in turn providing investment opportunities.
Industrial strategies to make a comeback
Whether nations go even further and resurrect the kind of industrial strategies popular in the post-war years only to fall out of favour in the 1980s and 1990s is unknown. However, there are signs the US and others may at least be tempted to shield industries deemed of national importance in response to China’s state-led development.
There are signs the US and others may at least be tempted to shield industries deemed of national importance
Biden has promised a “comprehensive manufacturing and innovation strategy that will marshal the resources of the federal government in ways not seen since World War II”. For its part, the EU is finalising a new industrial strategy. It is reported to be contemplating whether to try to reshore key sectors or allow greater use of state subsidies, with Germany, France and other members understood to be pushing for the bloc to become more protectionist.
As for the UK, having abandoned a formal industrial strategy first developed in 2017, its plans are vague. Nonetheless, it has signalled it wishes to improve transport infrastructure and innovation in the digital economy. Like other countries, it is looking to drive innovation in new technologies to support the transition to a low-carbon economy.
Whether countries adopt formal industrial strategies, more companies are likely to be favoured by their own governments via subsidies and tax incentives. If governments look to build up ‘national champions’, that could provide attractive investment opportunities.
Climate change: A new front in the trade war?
With the economic impact of climate change forecast by some to reach $69 trillion this century, governments around the world are stepping up efforts to address the issue.
Steve Waygood, Aviva Investors’ chief responsible investment officer, believes a race to be at the forefront of the key technologies needed to combat climate change could mark the next front in the battle between the world’s leading powers.
Climate wars could be set to replace the trade and tech wars of recent years
“Whether through regulation, limits on exports, tariffs, or significant investments, we believe the US, China and EU will be keen to take the lead on climate action,” he says.
Waygood cites China’s rare earth monopoly, the EU’s battery regulation, and President Biden’s plans to buy American-made electric vehicles for government fleets – all announced since December 2020 – as evidence.
It would be somewhat ironic if the global drive to tackle climate change were to lead to a further ratcheting up of tensions, given the urgent need for international co-operation. Then again, the same could have been said about the coronavirus pandemic and yet cooperation has been in short supply. Globalists are pinning their hopes on Biden countering this, but he faces a tall order in reversing the tide of economic nationalism.