As international trade liberalization goes into reverse gear, what impact on U.S. businesses with global interests?

January 25, 2017

We continue to believe (or is it hope?) that the long-term arc is towards greater openness and lower trade barriers. However, the near and medium-term conditions may be quite the opposite.

The U.S. has generally trended towards lowering barriers to trade over the last 150 years, and since World War II the U.S. has promoted the liberalizing and democratizing effects of trade and interconnected economic relationships as evidence of its superior free-market approach in contrast with the closed economies of Soviet Union and other communist states. In fact, the U.S. has not withdrawn from a single trade agreement since 1866, when the Canadian–American Reciprocity Treaty with Great Britain was terminated in the aftermath of the American Civil War.

U.S. trade relations with other countries fall into the following categories:

  1. Free trade agreements, such as NAFTA, TPP and the proposed TTIP
  2. Normal trade relations, also known as “most favored nation” status (MFN)
  3. Lack of normal trade relations, which applies only to North Korea as trade relations with Iran and Cuba were headed in a positive direction under President Obama

The Obama administration and its Republican and Democratic predecessors have worked with other developed and emerging economies for many years to make sure that a large portion of global trade was conducted per a U.S.-led framework.

This effort is most evident in the twin trade deals that are now unraveling: the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Plan (TTIP). Together, these two trade agreements would have governed a substantial amount of global trade with strict rules designed to open markets to competition and provide a level playing field for U.S. companies. Despite the hard-won commitment from TPP’s eleven member countries, it is clear that the TPP isn’t moving forward in its current form, and the TTIP has an uncertain future.

This has several implications for U.S. companies. Besides the obvious loss of free-market access to rising economies in Asia and the world’s largest economic zone, the European Union, a medium-term trend towards protectionism and an uncertain policy and investment environment for U.S. companies operating outside the U.S. may lead to curtailed ambitions for international growth or a delay in the execution of global market expansion.

There may be an upside of a renewed focus on U.S. business and investment, but it is the rare U.S. headquartered company that pursues international growth without attending to its domestic market first. Thus, in the medium-term, it may lead to a slowdown in the diversification of revenue from non-U.S. sources.

Executive Suite Questions:

  1. Are the international markets important to our company’s growth strategy likely to continue working in the direction of increased trade liberalization or are they likely to be in the cross-hairs of a Trump administration?
  2. What other countries offer viable and addressable markets for our goods, other than China, Mexico and those visibly on Mr. Trump’s policy agenda?

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