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Comment                                                                                     31 January 2017

Unexpected abrupt changes    

by Cees Bruggemans          words 660

To get jobs back and stimulate home production and growth, Trump favours major intervention in manufacturing trade specifically. This has overnight caused all kinds of disruption while raising deep concerns.

It is as if Trump wants to go back into the past with his protectionism, and replay a Brazil import protection scheme that ultimately didn't work. And he wants to do it in a sector least amenable to generating future job growth.

 

Globally, there is less demand growth for goodies and more for services as incomes rise. That puts manufacturing on a relative long-term decline.

Secondly, we continue to improve technology and labour savings, causing manufacturing jobs to become steadily fewer.

Thirdly, Trump would be disrupting relations with countries that are heavily concentrated on manufactured exports, such as South Korea, Japan, Turkey, Mexico, Germany and of course China.

These competitors aren't going to stand by idly while their companies become threatened, inviting retribution of their own in attempts to protect what they have achieved.

Meanwhile, the Trump inclination to deregulate heavily has unleashed a race in many sectors to identify suitable corporate takeover targets, now that such business practices may be less frowned on or scrutinized.

The dynamically changing IT communication field and energy production are only two examples where restructuring has overnight taken on a different complexion.

Synergistic benefits may be reaped (lowering costs) but strategic mistakes may easily be made too (ensuring costly detours ultimately to be written off).

It would seem the Mexican Wall is an early Trump priority and a deeply committed one. It carries a conviction of keeping people flows manageable, and especially address the drug trade into America. One notices few references as to how such flows could be deflected into new channels.

The focus is on Trump’s wall (costing some $14bn and supposedly to be funded from higher import duties on Mexico, with the US having an annual trade deficit with Mexico of $60bn at present).

Meanwhile, over in Europe there is the equivalence of walls having gone up (in Hungary and other Balkan countries), the Channel is a Millennium old UK fence while all of Europe is to contribute to beefing up coast guard navy patrolling all over the Mediterranean. This catches two birds with one stone. Trump is demanding Europe pays its fair share of NATO, while at the same time some of these assets are to be actively used to control population flows, an even bigger issue in some regions of Europe than in America.

There is also talk of tightening internal controls over population movements (ending Schengen for instance).

Having set the ball moving, the Trump administration is satisfied with having dropped the TTP trade deal, while Nafta (covering America, Canada & Mexico) may be up for renegotiation rather than scrapping.

In every respect, however, Trump favours bilateral deals rather than multilateral ones.

The global disruption set in motion this way is massive while lowering business confidence, causing investment intentions to be lowered and postponed.

So whereas in some respects capital will get mobilised  (acquisitions, investing in the US), the global trade and activity disruptions are major in some regions and sectors. And that is just in the first week of the Trump presidency.

Wars are extremely costly in things destroyed, but also create scope for renewal in ending old practices, trying new ones and in some instances having the means for investing in a new world once the dust settles and greater certainty has been regained.

Meanwhile, focus is on the damage being done and welfare (income) being lost. Trump, Brexit and the Asian and European disturbances are going to be major and costly.

Countries not directly affected are said to be beneficiaries from diverting capital investment flows, except if they have large current account deficits and are globally exposed that way.

South Africa may not be directly in the line of fire, but it won't benefit necessarily much either, given size and structural shortcomings, aside of political risk.

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website  www.bruggemans.co.za

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Twitter  @ceesbruggemans

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