In 1988, a 41-year-old Donald Trump talked to the American talk show host David Letterman about his scepticism of free trade: “We are living in very precarious times. If you look at what certain countries are doing to this country. Japan has totally taken advantage of this country. I am talking about the trade deficits. They come and they talk about free trade… We defend Japan for virtually nothing, which is hard to believe.”
Three decades later, now President Trump has made similar remarks on trade policy, speaking from the White House last week, saying: “Our farmers in Wisconsin and New York State are being put out of business, our dairy farmers. And that also includes what’s happening along our northern border states with Canada, having to do with lumber and timber. We can’t let Canada or anybody else take advantage [of us] and do what they did to our workers and to our farmers. This is another NAFTA disaster, and we’re not going to let it continue onward.”
Trump’s Unwavering Policy
Considering the longevity of his beliefs, those in opposition will be hard pressed to change Trump’s views, says former Danish Prime Minister Anders Rasmussen.
Rasmussen served as Prime Minister of Denmark for eight years, and worked as the Secretary General of NATO from 2009 to 2014, playing a key role in global politics. With his decades of experience, there is one policy he is sure President Trump will pursue: protectionism on trade.
“Unfortunately, I have to say that I think Trump is sincere in his scepticism concerning free trade. I am pretty sure Trump will pursue his trade policy, no matter what. So now we can expect a fundamental change in global trading as expected. We will, in no doubt, confront a much more, truly competitive world trade,” said Rasmussen.
Why Protectionism Won’t Mean Jobs
In 2016 the goods and services deficit of the US was $502 billion, up $2 billion from $500 billion in 2015, according to the US Department of Commerce. The US has a huge trade deficit, Rasmussen said, which President Trump used to argue that the US worker has lost out on employment and business to the Chinese and other global trade partners.
“It is a misunderstanding to believe that you can protect your own job through protectionism. There is a disconnect between what you see and what you do not see,” said Rasmussen.
Take Walmart (WMT), the US retail giant as an example. Walmart’s business model is built on a reliance on Chinese factories and low-cost products from the Chinese, which has given US consumers clothing and shoes at low prices.
“What you see is US manufacturers losing deals to Chinese competitors. What you don’t see is Chinese households rising incomes which they then use to purchase goods from the West, supporting the US economy,” Rasmussen said.
“Furthermore, the savings US consumers make shopping at Walmart, they then spend that money on US goods and services, creating more jobs. But these impacts are not as visible.”
Tension Between US and Russia to Continue
“Trump has said the US will stop being the world’s police force. But America is destined to be the world’s police force. They cannot retire. Russia will keep on challenging the US’s global leadership. It is in Russia’s interests to keep global conflicts going as the country needs to its neighbour to remain weak and fragmented,” said Rasmussen.
“Investors need to be aware, that the relationship between the US and Russia is not going to improve any time soon. It is safe to say the tension will continue long in the future. The relationship will be very tense for decades to come.”
Automation Disrupts Economic Growth
Besides a negative geopolitical backdrop and changes to global trade, there are other headwinds investors should be aware of; Automation is disrupting global economic growth, according to Iain Stewart, manager of the Silver Rated Newton Real Return fund.
“Automation, technology, is a double-edge sword. Over the last two decades, technology has really affected number of people employed in manufacturing. The numbers of robots has risen and productivity is weak. It is hard to see how we can have reflation in the face of this big structural trend,” he said. “We believe we are still in a disinflationary environment, or we are almost into a deflationary era.”
Stewart’s views is in line with a research from the Centre for Business and Economic Research at Ball State University in the US, which shows that 85% of manufacturing jobs losses in the US are due to technological change.
How to Invest in a Deflationary World
Stewart believes that these structural trends are unlikely to change anytime soon, therefore he is taking a cautious approach when constructing his portfolio. As such he owns government bonds issued by the US, Australia and New Zealand and gold in his portfolio.
In terms of equities, he is avoiding financial stocks as he believes the recent rally in financial stocks is due to the hope of further interest rate rise in the US, which he does not think will come. Instead, Stewart likes media companies, and auto stocks, which he believes is a sector that is benefiting from the low interest rate environment.
“Thanks to low interest rates, a lot of deals are being approved that allowed people to buy cars. This brought forward a lot of demand in car industry, stimulating growth,” said Stewart.
