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Davos and world trade in the spotlight

Peter Warnes  |  02 Feb 2018Text size  Decrease  Increase  |  
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President Trump wants trade agreements to be "fair and reciprocal". This will mean greater emphasis on the competitive advantages of individual countries. It will mean a race to the bottom in the inputs that determine competitive advantage.

Manipulation on a scale yet experienced is likely to follow. The race to the bottom has already started in corporate taxes, incorporating investment incentives, sucking revenue from government coffers. The expectant offset being greater activity, higher profits and wages and therefore higher tax revenue in the longer term. If it was just that simple.

One race to the bottom that will not be held will be the wage rate race. There will always be those undeveloped countries where wage rates are significantly below those of developed nations. Politicians in the developed world, beholden to their constituents, strive to increase the standard of living with an environment supportive of higher wage levels and wages growth.

Low wages and higher productivity will continue to be an advantage of the undeveloped world. In the developed economies, higher wages and marginal growth in productivity in tightening labour markets will need to be offset by lower taxes and incentives. But these are one-offs.

When all competitors have done their best to maximise their competitive advantage, the final arbiter will be currency. A race to the bottom here could leave world trade in upheaval and possibly be the final nail. President Trump has already accused China of currency manipulation.

But aren't lower corporate taxes and associated investment tax incentives a form of manipulation? Should it come down to a currency arm wrestle, those countries with the largest foreign reserves have the upper hand.

The most recent information available reveals the following Top 10 rankings as at December 2017.

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Exhibit 1: Foreign Reserves (excluding gold)

chart

Source: Trading Economics

 

The US is well down the list at US$123 billion, below Singapore, Poland, Israel, Czech Republic, Mexico (embarrassing?), Indonesia, Thailand and the United Kingdom. Be careful what you wish for Mr President. This is a marathon not a sprint, although after another three years Donald Trump will not care, as I don't believe he will run again.

The naivety of Secretary of the Treasury Steven Mnuchin was there for all to see at Davos. His "weak dollar" scenario was a reminder that investment bankers are generally not too well-versed in economics. The BYJAR (Bugger You Jack I'm Alright) principle is not a sound long-term strategy in the global village.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

 


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is Morningstar's head of equities research.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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