US And China In 2017: Political Risk Analysis Is Essential

Business, China, Company Strategy, Economics, Oil & Gas, US

Economic crisis followed by a geopolitical conflict

By John Richardson

ON MONDAY, I talked about how US companies might lose out in the long term  under the new Trump administration as China’s economy evolves. This post was mainly for chemicals industry strategic planners with a 5-10 year perspective.

The more immediate concern for the chemicals industry centres around statements such as this one, as usual via Twitter, from Donald Trump on the US-China relationship:

China has been taking out massive amounts of money & wealth from the US in totally one-sided trade, but won’t help with North Korea. Nice!

What is very worrying is that this Tweet didn’t make the front pages when it hit the news cycle yesterday. The reason is that Mr Trump has said many more shocking things over the last 18 months, and so we have become immune to shock.

But he is no longer just the Republican nominee who nearly everyone said couldn’t win. He is of course now the president-elect and in less than three weeks will be inaugurated, and so his words matter much more today than they did a few months ago. Every chemicals company must, as a result, place political risk analysis at the very top of its planning agenda for 2017.

Sadly, I  see few signs of this happening. A series of product outlooks from ICIS over the last few weeks, covering the major olefins and aromatics value chains, have instead focused on the familiar ground of product-specific supply and demand factors, margins and oil prices.

We are mainly a company of journalists, or reporters, and so the people who work for ICIS are doing their job very well of reporting what people say, what they think and feel. A good reporter reports – accurately mirroring the mood of markets rather than commenting on the mood.

My own gauging of the mood has over the last few weeks produced the same results as my colleagues. People have as usual been asking me, “When is the XXXX polyethylene plant coming on-stream? What is your oil-price forecast for Q1?”

But these are not usual times. The post-Second World War consensus that we have all grown up with is threatened by Mr Trump’s forthcoming presidency.

The consensus we have grown up with is that US politicians have all agreed that globalisation is a good thing.  We have also come of age in a world where the US has looked outwards rather than inwards in terms of its geopolitical role. This quite brilliant post from fellow blogger Paul Hodges contrasts the approach of Presidents John Kennedy and Ronald Reagan with that of Donald Trump.

I must again stress that this is not political commentary on Mr Trump, but instead merely seeks to plainly describe the new facts on the ground. These new facts are telling us that we are entering the unknown with the Trump presidency. Will his approach be better for America and the rest of the world than the post-Second World War consensus or will it be worse? Nobody knows the answer because we are entering the unknown. And when you don’t know the answer to a question it would be sheer commercial folly not plan for the worst.

Specifically in the case of the US and China, this is a reminder of how things could play out in 2017:

  • The stronger dollar widens the US trade deficit to the point where the Trump government is forced to respond in a bid to deliver on its election-campaign promise of new jobs. This involves declaring China a currency manipulator and levying heavy tariffs on Chinese imports. We end up in a global trade war.

Mr Trump’s ability to deliver on his election promise has to also be in question because of the long-term rise of automation. This explains why economists who took part in a December Wall Street Journal survey believe that the US will add just 7,000 manufacturing jobs by the end of 2017. The number of people employed in US manufacturing is now back at the 1941 level, when the workforce was nearly three times smaller.

But the more important context behind Mr Trump’s efforts to transform US manufacturing employment is the end of the Economic Supercycle. The retirement of the Babyboomers guarantees less demand for manufactured goods. This is unless the US manufacturing and service sectors can be reinvented to better serve the needs of older people and young people with incomes lower than their parents.

Back to China and my chart for today on the left. The International Monetary Fund (IMF) has again warned about the scale of China’s debts. Economic history suggests that Chinese debt is at a level that has previously triggered crises in other countries, warns the IMF. The added burdens of more capital flight on a stronger dollar and a global trade war would increase the chances of a major debt crisis in China. This would have far-reaching global economic consequences.

What about geopolitics? How will Mr Trump’s new approach work in keeping the peace with China? Will peace be threatened over issues such as China’s Nine-Dash Line territorial claims in the South China Sea? (See the map on the right). If China and the rest of the world are in recession does this make military conflict more or less likely?

In this world of unprecedented uncertainty all we can do is plan sensibly. Every chemicals company must set up a team of political risk analysts. This is where we can help.

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