WHEB Commentary

Ted Franks

Monthly Commentary June 2018

In the depths of February two of us went on a research trip to a logistics trade fair. One of the presenters held up a small pineapple from the Caribbean. He marvelled that it was available on UK supermarket shelves for £1. The cost just for sending it as an individual item, he said, would have been over £5.

Such is the connectedness of international trade. Shops are full of things which have travelled huge distances, selling for low prices. It’s not just food. We take it for granted that we can easily access the latest technologies from US, fashion from Europe, and cars from Japan. We are presented with a range and quality of products that previous generations couldn’t imagine.

And we can buy them at low prices. Not just in the advanced economies of Europe, but everywhere. Trade has been a key reason why the cost of a reasonable standard of living has fallen all around the world. In many regions, increases in wealth and wellbeing would have been impossible to replicate otherwise.

But trade is also messy and complicated. In the first year of high school, economics pupils learn that two countries both benefit from trading with one other. However, an overall net positive disguises tensions underneath the surface. Within those countries there are likely to be both winners and losers.

Perhaps more importantly, there will be people that feel like winners, and people who feel like they have lost. The many and complex causes of inequality are ignored. As we are seeing now, resentment can turn into political backlash.

President Donald Trump doesn’t seem to have time for complicated explanations. His conviction in the evils of international trade has been with him for forty years. It has remained despite the international expansion of his property business. It is now bolstered by a group of advisors from the fringes of economic thought. And he is putting his belief into action.

It started small. In January, he approved targeted measures on solar panels and washing machines. In the Spring these skirmishes broke into broader conflict. Citing national security concerns, the Trump administration has slapped tariffs on its oldest and closest allies. The manner in which he did so has forced them to respond.

So, at the start of this month, the world has been dragged into a trade war. But the long-term target for President Trump and his acolytes has always been China. So the tariffs and other measures targeting China are potentially on an significantly larger scale.

It is possible that this is all bluster and negotiating tactics. But even so, the damage to global trade is already tangible. The current US administration has, in a memorable phrase, “weaponised uncertainty”. Business confidence and investment is reduced as a result.

We feel exposed, especially in the resource efficiency and sustainable transport themes. Sustainability is a global challenge; the responses are global too. If there is such a thing as a model company in those themes, it would be a globally exporting manufacturer. A company that makes something special that improves sustainability, and sells that product around the world.

Sentiment has shifted against such names this month. Our top ten negative contributors in the period earn an average of 63% of their revenues outside their home country. Industrials was the weakest sector in the benchmark during June.

So how severe is the threat?

In the short-term, it could be quite a challenge. For sure, sentiment will take a while to recover. And there will be lots more twists and turns.

With a long-term view, we’re sanguine. Already the chorus of complaint from industry is growing. When economic growth is hit, the pressure will grow. And turning back the tide of connectedness in the era of digital communications, is a project worthy of Canute[i] himself.

[i] For those readers unfamiliar with King Canute, he was a 10th century King of England who unsuccessfully attempted to command the incoming tide to halt.