Vanguard economist rejects Trump globalisation theory
President Donald Trump's first few months of presidency have been a bumpy ride. While after he was elected, including a rally in the resources sector, things now seem to be cooling off.
Some highly controversial policies, including the defunding of Planned Parenthood and the blanket ban on immigration, have been put forward in the past few months, driving market volatility.
One of the key promises of Trump's election campaign was the halting of America's participation in globalisation. According to the President, increased globalisation has led to a rise in America's unemployment rate - particularly in the manufacturing industry.
His key catch-cry, "Make America Great Again", was all about giving jobs back to Americans who he says had been displaced by globalisation. Trump went into the election proposing a 45% tariff on Chinese imports and a 35% tariff on Mexican imports, in the hopes that international trade will be discouraged so that more Americans will gain work, American businesses will sell more goods, and in the long-term, the US economy will grow.
There seems to be a fundamental flaw to this logic according to Joe Davis, the global chief economist for Vanguard who says that it is factually incorrect to suggest that globalisation has led to an increase in manufacturing unemployment in America.
While it is part of the reason, the biggest factor for manufacturing unemployment across the world is actually technological innovation - specifically, the increased automation of workplace processes.
"There is this growing populist belief that in trade, one side wins and the other side loses. Not one country has seen a rise in manufacturing employment in the last five years," Davis says.
"It is not globalisation that has been the primary reason jobs have declined. The biggest reason for that is through technology, which is a global phenomenon. When you analyse the biggest reason why manufacturing employment has gone down, it's actually due to technology in automation. The biggest risk to the workforce is acceleration in technological change."
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Research from Vanguard shows that 87% of loss of employment in the manufacturing industry comes from technological advancement, leaving globalisation to account for only 13%. Davis describes Trump's globalisation view as the misdiagnosis of America's economic problems, and says that the response of a huge increase in global tariffs could be disastrous for economies around the world.
"Clearly associated with an increase in gloablisation is the lower cost of trading between and amongst businesses, across industries and between countries," Davis says.
"The average tariff rate in the United States is 3%, so when we hear from the administration [that we should anticipate future] figures of 35% or 45%, we are hard pressed to see another economic scenario that is more important for the rest of the global economy.
The last time we saw tariff rates that high was in 1931-32 which was during the Great Depression - not the best of economic times."
What does this mean going forward? Davis says that investment returns for all asset classes world-wide will be low over the next few years.
He says Vanguard's estimates for returns over the next five years. Global shares are expected to return 6-8%p.a. over the next five years, while global bonds will deliver a 1-3%p.a. performance. In regards to Trump's view on globalisation, Davis says the end result could be peaking tensions between America and China.
"We run the threat of misdiagnosis from administrations across the world trying to solve the wrong problem, and that runs the risk of tensions increasing between the two largest economies in the world," Davis says.
"I think ultimately it will get worse before it gets better, which will hopefully be in a year or two."