- Market Commentary
- By Jack Ablin
- May 7, 2019
What Will Happen if Globalization Shifts into Reverse?
Investors were greeted with two surprise endings this weekend. The first was the Kentucky Derby, where Maximum Security, the first horse to cross the finish line, was disqualified – only the second disqualification in the Derby’s 145-year history. The second surprise appeared in President Trump’s Twitter feed on Sunday.
President Trump, apparently frustrated with the trade talks, threatened to more than double the tariff collected by the US on more than half of all goods imported from China. Investors were caught offside for two primary reasons. First, they have largely assumed that trade negotiations between the world’s two largest economies were going quickly and seamlessly. White House economic adviser Larry Kudlow and Treasury Secretary Steve Mnuchin expressed optimism as recently a week ago that the US and China were ready to shake hands. The second assumption, about which we have always been skeptical, was that the outcome was binary: deal, or no deal. Because the dispute is so broad, from simple trade rules to concepts as far-reaching global economic dominance in technology and science, any negotiated outcome would be undoubtedly nuanced. We envision a scenario where certain tariffs remain in place indefinitely.
Ultimately, the dispute between the US and China represents a more ominous shift away from globalization, a trend that already had been largely in place since the early 1980s. The economic implications are secular, reversing favorable multi-decade trends in inflation and productivity. Even more important, the world’s largest companies have optimized their global supply chains around a notion of a frictionless flow goods, labor and capital between countries. Such a retrenchment threatens to dismantle a strategy that took decades to construct.