The global corporate world in general is in denial about the prospects of a global trade war, even though protectionism was a central theme in both the big political events in 2016: Brexit & Trump winning the US elections. The voters trusted the promises to bring back good manufacturing jobs to the locals and hence voted accordingly. Back to global businesses, which have thrived on back of international trade now for more than 3 decades (since 1985), the bad news is that protectionism in effect may have already begun on a grand scale. Big Banks and corporations like Wal-Mart, Apple and Microsoft are facing hurdles and scrutiny like never before, and with the US witch-hunting for offshore assets of its citizens and China suddenly turning over conscious on profits/dividends repatriation abroad, the glory days of free trade seem to be behind us. Now some of us may be arguing that in the US - the biggest import economy of the world – even though Mr. Trump is truly passionate about re-negotiating supposedly unfair trade deals and on raising tariffs to protect domestic manufacturing, a drastic change would be difficult, as it would require congressional approval, which today is controlled by the Republicans (Mr. Trump’s party on paper only), and who in essence believe in free markets. Well, anyone thinking this would be wrong! The relevant legislation in the US constitution gives the occupant of the White House remarkable leeway should he choose to go protectionist. He can restrict imports if such imports “threaten to impair national security”; he can impose tariffs “to deal with large and serious United States balance-of-payments deficits”; he can modify tariff rates when foreign governments engage in “unjustifiable” policies.
US Elections and Brexit may be relatively recent events, however, positive economic global news has been in short supply for quite some time now, especially in the Eurozone. Germany, though (as we know) has so far remained an exception to the rule, but even this nation, the currency bloc’s largest economy, is set to witness a significant drop in its exports this year 2016-17. While the expected real gross domestic product is predicted to gain a healthy 1.9 percent, the growth this time will not be due to higher exports. The widely held view of Germany as an export- driven machine is getting increasingly out of date: Most of its growth in 2017 will be coming from internal sources.
Rising employment, higher wages and low inflation are pushing household income and spending up. Private consumption, which accelerated in 2015-16 at the fastest pace in more than a decade, will rise another 1.8 percent in 2017 ~ according to a joint report by eight German economic research institutes. With German imports rising faster than exports, net trade as an engine of German GDP growth has become less and less important than before. The German problem becomes exacerbated when one looks at the investment figures in plant & machinery. In a sluggish economic environment, the Merkel government has been guilty of excessive fiscal restraint leading to a consistently weak corporate investment over the last few years. Equipment investment, which as mentioned in the report, has been below par for years, weights heavily on the trade-equation. Each Euro spent on machinery in Germany increases imports by more than 0.44 Euro, whereas by comparison, a euro instead spent by the government on non-machinery investments increases imports by nearly 3 times ~ Data by the research institute RWI Essen, Germany.
With the US and Eurozone being Pakistan’s main export destinations the developments in those markets are bound to affect us sooner or later. The question is that are we preparing ourselves for this eventuality? In the new international trading arena what we need to be mindful of is that essentially, countries today looking for increased market share or to sustain exports should not be just looking for FTAs or trade agreements, but also strategising to expand their manufacturing innovation hubs, invest in federally funded research centers that disseminate advanced manufacturing knowledge, and are willing to provide subsidies that are expressly contingent on exportation. In other words: in this new Great Game of Trade, the emphasis is on safeguarding home markets whilst going on to strengthening external focus influence. And to achieve this, leadership and direction must come from the Pak Commerce Ministry.