Over the past 3 years, the United States government under Donald Trump has sent shockwaves through the global economy on a near-constant basis. From withdrawing the country from the trans-pacific partnership, to dissolving and replacing NAFTA with CUSMA, to a series of tariffs laid on its major trading partners, which are now culminating in a trade war with China. For Canadian businesses, the American president’s actions have had mixed results.
With another American presidential election now ramping up, the prospect of Trump’s continued hold on power in the US promises more uncertainty, but also new business opportunities. Rising trade barriers are already negatively impacting global economic growth, but American protectionism ultimately also means reduced competition for the US’ closest trading partners—most notably Canada and Mexico.
Rising trade barriers are slowing the global economy
The US-China trade war has already begun to show its effects, and many of the world’s major economies are forecasting a major recession. With tariffs going up between major trading partners, businesses and consumers are forced to absorb increased prices, driving down demand for goods all over the world. This is bad news for businesses, who are then left to compete amongst themselves to supply stagnant or shrinking markets.
On a global scale, growth in this type of environment is very difficult, and necessarily comes at the direct expense of competitors. Fortunately, rising trade barriers also mean that businesses are no longer forced to compete within a large global economy.
Trade barriers can also benefit Canadian businesses
While global demand may be sinking due to rising trade barriers, industries who find themselves on the correct side of a trade barrier can actually benefit. For example, the low-cost Chinese manufacturing has undercut both American and Canadian manufacturers. The trade war makes Chinese-made goods more expensive, with the aim of restoring the competitiveness of an American manufacturing sector. Under CUSMA, however, Canadian and Mexican manufacturers could also step in to offer manufactured goods in the US market.
At the same time, China’s reciprocal tariffs on US goods similarly makes it easier for third-party countries like Canada to compete in China. The impacts of this have already been made visible by data from the International Trade Centre (ITC), which showed significant export growth to both China and the US by third party countries like Mexico, Australia, Brazil, and Canada. In total, Canada’s exports to the US and China rose by $3.4 billion USD over the previous year.
4 more years of Trump will mean even more tariffs
Currently, major manufacturers are scrambling to move some or all of their operations outside of China. However, instead of moving to the US, as Trump had hoped, most are simply moving to southeast asian countries that offer similarly low-cost labour and lax regulations. If the current US president were to retain power in the next election in 2020, it would represent a clear mandate from American voters to continue and double down on his protectionist strategy.
In this case, the US would likely pursue more aggressive trade barriers to curb outsourcing to South Asia and Southeast Asia as well as China. While this would likely bring manufacturers back to the US, it would also continue to boost the competitiveness of manufacturers in other developed economies, particularly those that enjoy free trade with the US.
Finding a way forward
For businesses, knowing how to move forward is about balancing the effects of a slowing global economy with the potential benefits of changing trade relationships between major economies. Regardless of what happens politically in the US in the coming year, American consumers will face rising prices, providing businesses in the US’ free trade zone with an important opportunity.
China needs partners
As the US attempts to put pressure on the Chinese economy, other countries stand to gain a great deal by stepping in to work with China. That might mean purchasing Chinese exports at highly competitive prices to stabilise their manufacturing sector, or providing China with the much-needed imports that no longer flow from the US to China. Because of the amount of pressure faced by Chinese businesses and the Chinese state, third-party countries have the opportunity to develop very profitable relationships in the country.
Trump’s trade war is forcing changes on economies all over the world. Like any type of change, however, it offers both significant risks and opportunities for businesses. By understanding how these changes affect the markets in which they operate, their industries, and their businesses specifically, Canadian business owners can leverage otherwise turbulent events to drive growth.