Globalization Reset or Reversal?
Trade & Growth Under the Next US President
October 2016 | Roundtable
Lori Heinel, CFA
Deputy Global Chief Investment Officer
Elliot Hentov
Vice President and Head of Policy &
Research in the Official Institutions Group
US presidential elections always attract international interest,
given the country’s size and influence as a global superpower and
the world’s largest economy. But this year’s contest between Donald
Trump and Hillary Clinton is commanding more attention than
usual. It is not only because of the Republicans’ unconventional
reality TV star nominee, but also because each candidate represents
a starkly different view of the role of the United States in the world,
which could have dramatic implications for global trade and growth.
Amid a growing backlash against globalization that most recently led to the UK’s
surprise decision to leave the European Union, Republican nominee Trump has
departed from his party’s traditional embrace of free trade, vowing to overturn major
trade deals with the country’s three largest trading partners of Canada, China and
Mexico. Democratic nominee Clinton has also walked back from her earlier support of a
new trade deal with Asia. SSGA’s Deputy Global CIO Lori Heinel recently sat down with
Chief Economist Chris Probyn and Head of Policy Research Elliot Hentov to discuss the
global economic, geopolitical and market implications of a Trump or Clinton presidency.
Key Points
• Trump likely to reverse trade
agreements; Clinton favors reset
• Trump trade barrier proposals
might pose major shock to
emerging markets
• Clinton foreign policy change
likely incremental vs Trump’s
major redesign
Christopher Probyn, Ph.D.,
Chief Economist
• Fiscal stimulus more likely under
Clinton while Trump focuses on
tax cuts
• Trump victory could weigh on
USD and increase government
bond yields
• Equity sectors oriented to domestic
economy likely to fare better than
those dependent on foreign markets
Globalization Reset or Reversal? Trade & Growth Under the Next US President
Globalization & Income Disparities
Heinel: Elliot, Donald Trump has blamed North American Free
Trade Agreement and other free trade agreements for the loss
of millions of American jobs to other countries and for the
growing income disparities within the US. What do the
numbers actually tell us about the relationship between
globalization and income disparities?
...in real terms, incomes declined, while trade or
globalization was still proceeding fairly quickly.
Probyn: Technology probably has played a much bigger role in
displacing workers than trade. At the same time I do think that
the trade deals have benefited some at the cost of others and
there has been no explicit recognition of that. Economists never
say that these trade deals are good for everybody but that the
benefits to the people who win should outweigh the losses of the
people who lose. This is no more than the Kaldor-Hicks
compensation criteria which states that if the winners can
compensate the losers and still be better off, then the deal
should be made. But there has been no actual compensation.
The winners have won and the losers have lost.
Hentov: The irony is that — despite the real loss of jobs,
Trump supporters and other globalization opponents are
actually looking in the rearview mirror: 2016 is the first year
in the last 15 and only the second year in the past 30 years
where world trade is growing more slowly than world Gross
Domestic Product. In other words, rapid globalization is no
longer taking place. The shock from trade integration, the
distortions in the labor market, and the loss of certain
manufacturing jobs — these are all actually subsiding.
The perception of globalization impacting income inequality is
really a story of the after-effects of the globalization period. But
those after-effects are real, too. There is no question that in the
30 years of rapid trade growth, where trade grew twice as fast as
world income, income inequality rose dramatically in many
countries, particularly in the US. It is even more shocking if you
take the period from 2000 until now and see that for the
majority of Americans in real terms, incomes declined, while
trade or globalization was still proceeding fairly quickly.
Economists never say that these trade deals are
good for everybody but that the benefits to the people
who win should outweigh the losses of the people
who lose.
But we know that there was more at work than just global trade.
Income inequality is also a function of technological change
and of policy choices made in respective countries.
US policymakers have established retraining programs, but
they are viewed as less effective than hoped. A recent report
pointed out that the US has spent only 0.1% of its GDP, onesixth of the Organization for Economic Co-operation and
Development average, on retraining programs or worker
Heinel: That’s right; a report last year, for example, pointed out
that between 2000 and 2010, the US lost roughly 5.6 million
manufacturing jobs. But only about 13% of those losses were
explained by trade. The rest were lost due to automation or
other technological improvements to productivity.1
Figure 1: Ratio of World Merchandise Trade Volume Growth to World Real GDP Growth, 1981–2016
20
2.5
15
2.0
10
5
1.0
1.3 1.5
1.8
1.8
2.8
3.2
3.0
2.5
1.5
1.5
4
3.4
2.7
2.5
1.8 1.6
1.5
2.0
2.5
1.8
2.1
1.6
1.5
3
1.9
1.0
1.1
1.1
1.1
2
0.8
0.1
0
0
-0.2
-5
-1
-10
-15
1
-2
-3.0
1981
1986
— World Trade Volume Growth (left)
1991
— World GDP Growth (left)
1996
2001
2006
2011
2016
-3
l Ratio of Trade Growth to GDP Growth (right)
Source: WTO Secretariat for trade, consesus estimates for GDP. As of September 2016.
The above estimates based on certain assumptions and analysis. There is no guarantee that the estimates will be achieved.
https://www.wto.org/english/news_e/pres16_e/pr779_e.htm.
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Globalization Reset or Reversal? Trade & Growth Under the Next US President
transition support.2 So I can understand why people are angry
about that, and why there is a need for a different approach
toward those who have lost out going forward.
And it is true that global trade has declined meaningfully since
the global financial crisis. The latest World Economic Outlook
report from the International Monetary Fund shows that in the
10 years from 1998 to 2007, the volume of global trade increased
by 6.7% a year; since 2008, it’s been 3%.
Economists have looked at three potential reasons for the drop.
One is cyclical: if your economy is growing more slowly, then
obviously you import a lot less, and that adversely affects
exporters. A study for the World Economic Forum3 concluded
that this cyclical factor could account for approximately half of
the slowdown in trade. That also means that if growth picks up,
trade will increase along with it.
In terms of the other half of the decline, one hypothesis was
a reduction in the building of global value chains due to a
slowdown in the rate of formation of new firms. New companies
are usually the ones that are most efficient and take advantage
of these kinds of opportunities. However, a closer look
indicated that this reduction was not really a big factor in
the trade slowdown.
The third issue was protectionism. There has been a bit of an
increase in protectionism and certainly we have not seen
great trade liberalization since the global financial crisis. So
protectionism probably has played a meaningful role in slowing
down trade.
Trade Policies Compared
Heinel: Elliot, Oxford Economics suggested that Donald
Trump’s economic policies, if fully implemented, could depress
global growth, cause the loss of 4 million jobs and reduce US
GDP by 5 percent from where it would otherwise be in 2021, a
loss of as much as $1 trillion from the US economy.4 What are
the main implications of Trump’s protectionist policies for the
global economy and global capital markets, and how would you
compare that with Clinton’s proposals?
A Clinton presidency would basically mean a
lack of future trade deals; whereas a Trump
administration could theoretically mean the
re-erection of trade barriers.
State Street Global Advisors
Hentov: We don’t have a policy outlook from either candidate
that is pro-trade; that has basically disappeared from the
discourse. Protectionism is nothing more than the unwinding
of open trade. If the US economy were to take a hit of $1 trillion,
that translates into about $200 million in imports that the
US would not make over those four years. It is obvious that
emerging markets would suffer disproportionately, particularly
Mexico and Asian exporters. There is a reason the peso has
moved in parallel with Trump’s standings in the polls, and
that’s because 70% of Mexico’s exports go to the US.5 Trump
could deliver a real economic shock to certain emerging
markets, with disruption across basically all the major stock,
bond and currency markets of those respective countries. In my
view, a Clinton presidency would basically mean a lack of future
trade deals; whereas a Trump administration could
theoretically mean the re-erection of trade barriers.
Foreign Policy in the Spotlight
Heinel: Elliot, what about the geopolitical implications of a
Trump vs a Clinton administration?
The potential for a massive crisis and for risks to
escalate is enormous...
Hentov: I expect Clinton would pursue an incremental change
from the status quo, slightly more interventionist and perhaps
more transactional. It would not be systemic change, which
could be the risk of a Trump presidency. His rhetoric implies an
erosion of the existing international order. He is challenging the
basic tenets of America’s role in the world, something that,
ironically, America’s biggest geopolitical rivals have been asking
for. The foreign policy objective of other nations such as Russia,
China, and Iran has been for the US to retreat from upholding
an international order and setting governance norms that apply
to the rest of the world. Trump is suggesting redesigning that
entire system.
Presumably his goals differ from those nations, but the starting
point is the same. The potential for a massive crisis and for risks
to escalate is enormous, because he would be hollowing out the
pillars of the existing system by degrading institutions and
alliances. He would be signaling to the participants in the world
order to change their behavior, and therefore change the entire
table of calculations on which the world operates today. So allies
and adversaries would behave differently. The potential for
geopolitical risk is exponential in a situation like that. Even if his
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Globalization Reset or Reversal? Trade & Growth Under the Next US President
campaign promises and rhetoric are mitigated by other
influences, such as the US Congress, or otherwise moderated,
some damage to US credibility would be irreversible. Of course,
he could moderate his campaign promises and rhetoric once in
office, but some damage to US credibility would be irreversible.
In terms of markets, the geopolitical risk premium on any asset
class that has an implicit reliance on US credibility and the US
underpinning the world order would be affected. There would
be a risk premium on some markets that would begin to look a
little bit more vulnerable than the day before the election.
Global Economic Implications
Heinel: Chris, as the US is still the largest economy in the
world, how would some of the domestic policies favored by
Trump versus Clinton affect the broader global economy?
Trump will reduce taxes on the wealthy on the basis
of the trickle-down theory that lowering taxes on the
rich will spur them to create more jobs and that a
rising tide will lift all boats.
Probyn: Because we still set a direction, everyone would
prefer to see a healthy US economy rather than a stagnant one.
Trump has said he will lower taxes on the rich, and Clinton has
said she will tax the rich more. Under Trump, you might see the
repeal of Obamacare; you would not see that under Clinton.
And as about 20 million Americans get their healthcare
through the Obamacare exchanges,6 the Medicaid expansion
that came along with it, or from being allowed to remain on
parents plans until aged 26. So under Trump, the higher
income group would benefit through tax reductions and lower
income groups could lose subsidies that would allow them to
buy affordable health insurance.
Clinton will be open to fiscal stimulus in a way that Trump
won’t be. So we could see more infrastructure spending under
Clinton, at a time when most economists recognize that
monetary policy has long reached the end of its effectiveness.
Using the current low interest rates to borrow to invest in
infrastructure could pay for itself in terms of improving
productivity and competitiveness.
Trump proposes to reduce taxes on the wealthy on the basis of
the trickle-down theory that lowering taxes on the rich will spur
them to create more jobs and that a rising tide will lift all boats.
We saw a similar attempt during the Reagan administration of
State Street Global Advisors
the 1980s. However, the prosperity of the Reagan years was in
fact an old-fashioned “pump priming,” fueled partly by tax cuts
but also by big increases in defense spending. It wasn’t a
supply-side revolution at all; it was a traditional Keynesian fiscal
stimulus.7 And as a result, the U.S. government blew out its
deficit and had to reverse course in 1986.
Market Implications
Heinel: What are the market implications of a Trump versus
Clinton presidency and how should investors think of
positioning themselves?
Probyn: If Trump wins, I would expect a lower dollar as some
investors would seek to reduce dollar exposures, but then where
are you going to put it? In euros? I don’t think so. Maybe the yen
becomes a currency of choice at that point. There would
certainly be some stock market reaction and uncertainty.
Healthcare stocks could get hurt on the potential undermining
of Obamacare. Yields on the government bonds would go up,
because of the tax cuts Trump is envisaging and his unsettling
statements about renegotiating the debt.
Heinel: You could also argue that increased protectionism in
the US will add to inflation, as increased tariffs will limit the
supplies of some goods, in addition to ensuring further subdued
long-term growth and heightened volatility. You can imagine
that investors might want to review both the inflation hedges
they have in place as well as their portfolio buffers against
volatility. In terms of stocks, you would expect that sectors
more oriented to the domestic economy would fare better than
companies dependent on foreign markets. Given the focus
during this presidential campaign on how globalization has
hurt low-income Americans, the irony is that the evidence
shows that protectionism is worse for the poor than the rich.
One study showed that in an average country, high-income
earners would lose 28% of their purchasing power if trade
barriers were erected; by contrast, the lowest 10% of incomeearners would lose 63% of their spending power, because they
typically buy more imported goods.8 So that brings us where we
started: what do the prospects for global trade and growth look
like for the next four years?
One study showed that in an average country, highincome earners would lose 28% of their purchasing
power if trade barriers were erected; by contrast,
the lowest 10% of income-earners would lose 63% of
their spending power...
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Globalization Reset or Reversal? Trade & Growth Under the Next US President
Hentov: Under either US presidential candidate, the prospects
for trade and growth are fairly muted, though Trump certainly
poses bigger risks to the downside. There is no obvious strong
engine of growth for the global economy in the coming decade.
We do not have massively large pools of untapped labor that will
join the global economy. There is no technology on the horizon
currently that would drive productivity significantly higher,
though technology is an unknown factor that could still
surprise on the upside. And we do not have a benign policy
outlook that would basically improve the efficiency of how
capital is spent around the world.
...a Trump administration will represent more of
a reversal of trade and globalization; whereas a
Clinton administration might be more of a reset.
You can call them free trade deals or other types of regulatory
coordination, but we don’t have any of that. Those were the
three engines that really helped galvanize growth and
globalization during the 1980s, the 1990s and the first half
decade of the 2000s. Those are all gone and we seem to be
facing the lower for longer environment we have been
repeatedly talking about in which investors will need to be
much more thoughtful about where they find growth and
income in their portfolios.
State Street Global Advisors
Probyn: I do think a Trump administration will represent
more of a reversal of trade and globalization; whereas a Clinton
administration might be more of a reset. We do need to assess
outstanding trade deals like the [Transatlantic Trade &
Investment Partnership] TTIP9 and the [Trans Pacific
Partnership] TPP10 and figure out how to press ahead in a better
way. Trade deals that were meant to bring prosperity have also
brought anxiety to many. Creative destruction has always been
part of the capitalist system, but we must design and implement
ways to compensate those who are disrupted by these changes.
Michael Hicks and Srikant Devaraj, “The Myth and Reality of Manufacturing in
America,” Center for Business and Economic Research, Ball State University,
June 2015.
2
“The World Economy: An Open and Shut Case,” The Economist, October 1, 2016.
3
Emime Boz, “Why Has Global Trade Slowed Down?” World Economic
Forum, November 12, 2014. https://www.weforum.org/agenda/2014/11/
has-global-trade-slowed-down/.
4
“Trump Presidency Could Cost U.S. Economy $1 trillion: Oxford Economics,” Reuters,
September 13, 2016.
5
Bloomberg Editor-in-Chief Emeritus Matt Winkler, “The Peso as Predictor
of a Donald Trump Presidency.” http://www.bloomberg.com/politics/
videos/2016-10-03/the-peso-as-predictor-of-a-donald-trump-presidency.
6
The US Department of Health and Human Services.
7
Keynesian fiscal stimulus is an economic theory of total spending in the economy
and its effects on output and inflation.
8
Pablo Fajgelbaum and Amit Khandelwal, “Measuring the Unequal Gains from
Trade,” The Quarterly Journal of Economics, 131 (3): 113-1180, 2016.
9
The Transatlantic Trade and Investment Partnership is a comprehensive trade deal
between the European Union and the United States, with the aim to promote trade
and boost economic growth.
10
The Trans-Pacific Partnership is a proposed free trade agreement linking the United
States and 11 other Pacific Rim economies.
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Globalization Reset or Reversal? Trade & Growth Under the Next US President
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