President Trump wants to put America First, but what happens if other countries follow his lead? Fathom Consulting considers the economic consequences of global isolationism.
The commentary and opinion in this piece is provided by Fathom Consulting.
In their latest Global Economic and Markets Outlook, our partner Fathom Consulting has analyzed the impact that the current trend towards isolation will have on growth forecasts for 2017 and 2018.
Using Thomson Reuters data, Fathom considers a scenario where President Trump’s actions are mirrored by other countries. If this happens, the impact on the global economy could be significant.
Risk and central scenario
Donald Trump’s election victory represents a significant step along the road towards a more isolationist world.
In Fathom’s central scenario, President Trump stays true to his campaign rhetoric and adopts restrictive trade policies, notably against China.
It is a gamble, but one that pays off as China concedes. In the chart below, this scenario is titled ‘U.S. decouples’.
Fathom’s risk scenario, titled ‘Global isolationism’, assumes that other countries follow Mr Trump’s protectionist suit, global isolationism takes hold and it is a terrible outcome for the global economy.
This scenario sees slower growth, if not outright economic contraction, across the developed world.
— Lipper Alpha Insight (@Lipper_Alpha) January 25, 2017
The response to isolationism
Outside of world wars and the global financial crisis, the share of global trade in GDP has risen for nearly 200 years.
As the graph below shows, when tariffs fall, trade rises.
If other countries swell the rising tide of isolationism, the reduction in global trade via tariffs and other barriers, as well as a corresponding reduction in the gains from comparative advantage, will be profoundly damaging for global growth.
Watch video – Economic Insights: The Eikon Chartbook from Thomson Reuters
The U.S./China relationship
Although the stakes are high, Fathom’s central view is that Mr Trump’s gamble will pay off and China will co-operate.
If Donald Trump were to slap tariffs on imports from China, one might assume that China would respond by restricting access to its market for U.S. multinationals.
However, Fathom believes that it is in China’s interest to cooperate. After all, nearly 4% of its GDP is derived from exports to the U.S.
It appears that investors are of the same opinion, with Fathom’s China Exposure Index (CEI) suggesting that they are confident that Donald Trump will strike a deal with China, increasing access to the Chinese market for U.S. firms.
Fathom’s CEI tracks the share prices of 25 U.S.-listed firms that derive a significant share of their revenues from China.
The index weights those firms according to their revenue exposure and compares their share price movements to the relevant S&P 500 sector benchmark.
Interestingly, it shows that U.S. firms that do business in China have outperformed their peers since the election.