Events to Watch: Prepare for Trump-driven trade conflict in 2018

In our recently released report FSG’s Events to Watch for 2018 we profiled the downside and upside scenarios that may imperil the strategic initiatives and revenue targets of multinationals. Over the next few weeks, we will be sharing a series of blog posts that highlight some of the major global events, and the potential impact on MNCs.

The future of global trade, and more specifically the danger of increasing trade-driven conflict, are top of mind risks for multinational executives. FSG believes that multinationals should pay close attention to the following two events: a U.S. exit from NAFTA, and a US-China trade war.

NAFTA Exit: President Trump may easily decide to unilaterally terminate NAFTA, as he has often threatened to do, giving a six-month notice to Mexico and Canada as a negotiating move. Given elections in Mexico and the United States next year, the potential for escalation and delayed resolution on trade issues could lead to an end to the agreement and increasing tariff and non-tariff barriers to North America trade.

The short-term impact for multinationals would be the following:

  • Investment collapse in Mexico and investment freeze elsewhere – Uncertainty about the timing and outcome of new trade terms would depress investment into Mexico, with collateral effects on employment levels and domestic demand. Further supply chain integration efforts in North America would be paralyzed, depressing investment levels
  • Currency volatility – With greater trade and political risk, the Mexican peso and the Canadian dollar would likely depreciate, particularly creating greater inflationary pressure in Mexico that would require tightening monetary policy further. This would lead to reduced credit growth

Likelihood: 15%. While the prospect for a trade war scenario in North America is dire, opposition from industry associations and lack of a political consensus favoring protectionism in the US makes this unlikely. However, uncertainty over the future of NAFTA is almost certain to continue in 2018.

How to prepare: Reassess the impact of a NAFTA exit on the current localization of manufacturing plants in North America, especially for production facilities aimed at re-importing or re-exporting. Revisit your current level of market prioritization for Mexico—even if NAFTA is not dismantled completely, the potential for market disruption in Mexico is high

US-China Trade War: An even more dangerous scenario for multinationals is escalating trade-related conflict between the United States and China, with President Trump’s protectionist trade agenda and confrontational negotiating style driving increasing escalation that results in punitive tariffs.

The short-term impact for multinationals would be the following:

  • Unpredictable policy environment – Assertive and ad-hoc policy pronouncements from the US and China would render supply chains and purchase planning less predictable, increasing the cost of doing business
  • Volatile operating costs – Companies could see costs increase rapidly for raw, intermediate, and finished goods made in or sold via the US and China
  • Shifting investment – Companies would reconsider their existing production footprint and their plans for investment, as changes in the US and China’s trade regimes would undermine the rationale for cross-border investment
  • Relative gains – Changing materials costs and production processes could result in a competitive advantage for companies with flexible supply chain processes and little exposure to China

Likelihood: 20%. The US trade deficit with China will remain a major point of contention throughout the Trump administration’s term in office, and progress has been limited on reducing trade-related differences between the two governments. Still, the high costs for global growth of an escalating trade war mitigates against relations coming to a boil in 2018, though events on the Korean peninsula could exacerbate tensions sufficiently to drive punitive trade measures.

How to prepare: Multinationals should develop appropriate risk mitigation strategies to minimize potential supply chain disruptions as trade barriers increase, and reassess localization plans.

For more information

Clients can access our Events to Watch for 2018 report for in-depth scenarios, expected impact on business performance and operations, as well as recommended frameworks for contingency planning and effective market monitoring. Not a current client? You can purchase a copy on FSG’s online store here.

We also invite you to register and join our Events to Watch for 2018 webinar, presented by FSG’s Director for Global Economics, Antonio Martinez, and Global Head of Research, Joel Whitaker. Please register for the viewing time of your choice:

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