World Risk Developments November 2016

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How will President Trump’s trade agenda affect Australian exporters?

Mr Trump’s promise to use the substantial executive power of the US presidency to shake up world trade could have considerable knock-on effects to Australian exporters. But he will encounter powerful domestic opposition that could persuade or force him to moderate his initial positions. And he doesn’t propose to retaliate against countries with which the US runs a trade surplus, such as Australia. His opposition to the Trans-Pacific Partnership (TPP) could deny exporters prospective benefits, but it is less clear whether he will restrict the existing agreements that Australians use to trade with the world. Though the impact of Mr Trump’s economic and trade policies on the US outlook remains unclear, our modelling suggests that Australia’s manufacturing exports are particularly sensitive to Mr Trump’s trade policies, followed closely by food export receipts, while service exports appear less sensitive.

Campaign promises versus policies

Mr Trump announced on the campaign stump a 7 Point Plan To Rebuild the American Economy by Fighting for Free Trade. It suggests using all available means to secure a ‘better deal’ for the US from its trading partners. Specifically, withdrawing from the TPP, which has not yet been ratified; using every tool under US and international law to end violations of trade agreement abuses by other countries; renegotiating NAFTA under the threat of withdrawal; and labelling China a ‘currency manipulator’. Mr Trump suggests using every lawful presidential power to remedy trade disputes if China does not stop its ‘illegal’ activities, including its theft of American trade secrets. To this end he has threatened a 45% tariff on Chinese imports. He has also suggested ‘pulling out’ of the World Trade Organisation (WTO)—the rulebook for US commerce with 163 countries—somewhat in opposition to his call to bring trade cases against China to the WTO.

It remains unclear how closely President Trump’s policies will align with Nominee Trump’s rhetoric. Trade pledges could be ploys to secure concessions from trading partners and induce multinationals to increase their US investments. Yet if Mr Trump is intent on carrying out these promises, can he do it single-handedly?

Considerable unilateral powers

While Congress retains significant checks and balances over domestic spending, the president has considerable executive power over foreign policy, including trade policy, and the implementation and negotiation of treaties. Executive Orders (EOs) do not require congressional approval and have been used by every president, to implement new policies and overturn old ones. What’s more, multiple statutes authorise the president to impose tariffs and regulate foreign commerce.

So while both the Republican and Democratic parties have both long been in favour of trade deals, it seems likely that the president could withdraw the US from the WTO without congressional approval. Recent statements by Mr Trump also lower the chances of the US ratifying the TPP, particularly after the Obama administration announced it had suspended efforts to win congressional approval for the deal in its ‘lame duck’ session.

Constraints on presidential powers

But presidential powers are not untrammelled—they are limited by the constitutional separation of powers. If Congress disagrees with an EO it may issue more specific directives to the president. In addition, Congress can legislate to revoke powers previously delegated to the president [1]. In practice, however, a two third majority would be required in both the House of Representatives and in the Senate, due to the president’s veto power. Congress is further empowered by the informal ‘Hastert rule’, under which the speaker of the House of Representatives prevents a vote on a bill without support from a majority of the majority party. Though both chambers are Republican-controlled, Congress is unlikely to simply rubber-stamp every presidential policy. His policies are controversial even with many Republicans. And he failed to win a majority of the popular vote. All these factors will obstruct him.

US companies and states can also challenge EOs before the Supreme Court, on the grounds that the president has exceeded his constitutional powers or overridden congressional intent. In practice, however, both judicial and congressional challenges are likely to be lengthy and difficult processes. It is also possible that trade partners could retaliate against Mr Trump’s actions, rather than patiently wait for US court proceedings.

Some measures may be difficult to implement. For instance, his promise to direct the Treasury Secretary to label China a currency manipulator—and impose on it a 45% import tariff. The US Treasury recently determined that China meets only one of three criteria for identifying unfair practices and imposing penalties. Instead of manipulating the RMB down, China actually sold US$570b in foreign currency assets over the year to August 2016 to prevent a more rapid depreciation. The IMF estimates that the RMB has not been undervalued since early 2015.

Implications for Australia

The Australia-United States FTA is likely to be unaffected by the Trump Presidency. Mr Trump aims to reduce the drag of the trade dExport Finance Australiait on the US economy and to that end hopes to balance up trade with countries which it runs bilateral dExport Finance Australiait with. The US has run a persistent trade surplus with Australia for several decades (Chart 1). The bilateral trade relationship between Australia and its third largest export market is therefore likely to emerge unscathed.

 

 

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Other free trade agreements already in force—with China, Korea, Japan, Chile, New Zealand, and ASEAN—are also likely to continue.

The agreement most likely to fall victim to the new president is the TPP—Mr Trump believes the TPP will undermine America’s economy and independence. The Department of Foreign Affairs and Trade has estimated the TPP could eliminate tariffs on US$9b of Australia’s dutiable exports. But since this agreement isn’t in effect yet, it hasn’t delivered any of its promised benefits. Australia and other TPP signatories remain committed to a deal that would create significant opportunities for exporters of goods, services and investment, as well as established trade-facilitating rules that would address some of the spaghetti-bowl critiques of bilateral FTAs. The Government will continue to explore all avenues to capture the benefits of the TPP.

Including progressing, according to Australia’s Minister for Trade, Tourism and Investment—the Regional Comprehensive Economic Partnership. Negotiations for this deal are taking place among the 10 members of ASEAN plus Australia, India, Japan, Korea and New Zealand, and the final deal is expected to cover both goods and services trade plus investment and dispute settlement.

All told, a Trump presidency threatens to place some costs on Australian exporters, but also promises some benefits. Among the possible costs are

  • lost market access from suspended and tightened trade agreements, and more confrontational trade relations. Remember it isn’t just direct market access that’s at stake, but also sales lost where Australian companies supply materials and inputs to other trading partners that have their access to the US market restricted
  • higher interest rates and inflation that could eventually flow from the fiscal stimulus he promises
  • capital outflows from fragile emerging economies induced by the prospect of earning higher returns in the US.

Among the possible benefits are the boost to US and world growth, and commodity prices and export volumes, that could result from a Trump fiscal stimulus.

Asian emerging markets at risk from tighter financial conditions and protectionism

Medium term impacts on Asia will depend on the extent to which the stimulus to US growth from proposed tax cuts and infrastructure spending offsets the negative effects from higher government debt, tighter financial conditions, and protectionism.

The Committee for a Responsible Federal Budget estimated in September that full implementation of Mr Trump’s proposals would raise debt from 74% of GDP last year to 105% of GDP by 2026. This relies on conventional scoring methods and does not account for the impact of Mr Trump’s proposals on economic growth. After a sustained period of frugality (Chart 2), fiscal spending of this scale would, all else equal, certainly pep up near term US and global growth. But the boost to the US economy could also entail higher US interest rates and a higher USD. Sustained tighter financial conditions would revive pressure on capital flows to emerging markets—the Institute of International Finance estimates that portfolio flows to emerging markets declined to their lowest level since August 2015 in the week following the election. While emerging Asia is better placed than previously to manage capital outflows, higher interest rates would also exacerbate vulnerabilities from relatively high Asian corporate debt (Chart 3).

Asian economies would also be on the front line of disruptions to trade liberalisation—reflecting their high relative share of manufactured exports and integration into global supply chains. Within Asia, trade-oriented economies like Hong Kong, Singapore, Vietnam, Malaysia, Thailand, Taiwan and Korea are most vulnerable (Chart 4). Domestically-driven economies, like Indonesia and India, will be more insulated.

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How sensitive are Australia’s exports to changes in the US fiscal stimulus

To assess which Australian export sectors by state are most vulnerable to changes in the US outlook we used a statistical model to assess the sensitivity of exports to changes in US incomes. The sensitivities are measured using ‘elasticities’, which quantify the impact of a 1%-point increase/decrease in US incomes on Australia’s export earnings from the US.

Our results reveal that US merchandise exports out of Queensland, NSW, South Australia and Victoria are particularly sensitive to changes in US incomes (Chart 5). In these states, a 1% increase in US incomes would lift export earnings between 2.5% and 3%. Similarly, a fall in US incomes would have a commensurate negative effect.

 

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To understand what is driving these headline figures, we need to look at various export industries by state. To make the analysis manageable, we have split state exports into three broad categories

  • food, beverage and live animal exports
  • manufacturing
  • hard commodity exports—which include both fuels and minerals.

Since food and manufacturing make up the majority of exports to the US, our analysis will be confined to the impact of changing US incomes on food and manufacturing exports to the US.

Manufacturing exports are highly sensitive to changes in the US demand

Manufacturing tends to be heavily dependent on household incomes and investment. NSW and Victoria are our largest suppliers of manufactured goods to the US—making up close to 50% of all manufacturing shipments. Changes in US demand would significantly impact export revenues. But oddly enough, export-oriented manufacturing in NSW and Victoria aren’t as sensitive to US demand when compared to Queensland and South Australia, where a 1% fall in US incomes could shave off 3.5% to 4.3% off export revenues (Chart 6).

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To explain why, we looked at the composition of manufacturing exports from Queensland and South Australia which tend to be heavily weighted toward processed non-ferrous metals (used in construction) and passenger vehicles, industries which are strongly pro-cyclical. Furthermore, South Australia and Queensland’s manufacturing exports are not as diversified as the other states—over the last five years almost 45% of Queensland’s manufacturing exports to the US have been in non-ferrous metals, while 40% of South Australia’s exports have been motor vehicles (mostly passenger cars and motorcycles).


If Mr Trump is able to significantly lift infrastructure spending, the positive spillovers to US investment would have benefits to export-oriented manufacturers, with potentially outsized gains to exporters in South Australia and Queensland.

Food and beverage exporters are not immune from changes to the outlook

Australian food and beverage exports account for 36% of all exports to the US and is made up predominantly of beef and lamb. The sensitivity of the industry to changes in US income are quite similar across all the states, particularly when compared to the diverse results across manufacturing exports. On average we expect a 1% rise in US incomes would lead to around a 2.5% to 3.5% rise in export earnings driven by both higher global agriculture prices and stronger export volumes (Chart 7).

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If Mr Trump is able to get his tax cuts through Congress, the lift in household incomes would pose significant upside to food exporters, particularly beef, lamb and wine producers.

Upside for Australian lamb exports

The US is Australia’s largest and most valuable market for lamb. Lamb export volumes into the US have risen 8% p.a. over the last five years (Chart 8). Lamb in the US is eaten predominantly at restaurants as opposed to the home. Given eating out is highly dependent on household incomes and therefore the economic cycle, stronger income growth would be a positive for lamb exports to the US.

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Services appear less sensitive

The US is our second largest export market for services, behind China. The limited time series data on service exports by state means we have to restrict our analysis to aggregate service exports to the US. Our findings indicate service export earnings to the US have an elasticity of 1.3, which is less sensitive than most manufacturing and food exports.

Looking at recent trends in the services data, it appears that transport, financial, IT and other business services—which includes legal, merchant, R&D, professional and technical services—make up around 65% of service receipts from the US. These tend to be less sensitive to changes in US incomes, relative to manufacturing or food receipts and would explain the relatively less responsive movement to changes in US incomes.


Cassandra Winzenried, Senior Economist
cwinzenried@exportfinance.gov.au

Fred Gibson, Economist
fgibson@exportfinance.gov.au

The views expressed in World Risk Developments are Export Finance Australia’s. They do not represent the views of the Australian Government. The information in this report is published for general information only and does not comprise advice or a recommendation of any kind.  While Export Finance Australia endeavours to ensure this information is accurate and current at the time of publication, Export Finance Australia makes no representation or warranty as to its reliability, accuracy or completeness.  To the maximum extent permitted by law, Export Finance Australia will not be liable to you or any other person for any loss or damage suffered or incurred by any person arising from any act, or failure to act, on the basis of any information or opinions contained in this report.

[1] Such as under the Trading with the Enemy Act of 1917, the International Emergency Economic Powers Act of 1977, and the Trade Act of 1974’s Section 122.

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