Pictured left to right: Jeff Wacker, David Chmiel and Elizabeth Rust.

Early into 2020, it has already been a big year for Global Economic Events. The United Kingdom formally left the European Union in January, kicking off a year-long transition period. The United States and China entered the first phase of an ambitious trade deal that could signal the end of a long trade war between the countries. Trade and tariffs are likely to continue shifting throughout the year ahead.  Corporate earnings and US equity markets were both strong in 2019.  Now add the coronavirus COVID-19 to the list of 2020's economic disruptors.  In short, the picture is a complicated one to navigate.

At the 2020 SFNet Asset Based Capital Conference (ABCC), Jeffery Wacker, Head of U.S. Asset Based Lending Originations for TD Bank, led a panel on changing trade policies and their impact on the overall economy. On the panel were David Chmiel, Managing Director at Global Torchlight Limited, and Elizabeth Rust, Senior Economist at Keybridge, who shared their expert outlook on changing trade policies.

For those who were unable to attend the panel, here are some of the key questions that emerged.

Q: What business impact have changing trade policies had on businesses?

A. Jeffery Wacker – We’ve seen major macroeconomic shifts in the trade landscape already this year, which has introduced high levels of uncertainty for certain businesses. The impact varies sector by sector and business by business, so it is important that companies understand how changing policies will affect them. The disruption caused by shifting trade policies could be a growth opportunity for some companies that are able to position themselves well.

Companies have been preparing their financing to allow themselves more flexibility to either grow or reposition as tariffs and counter tariffs are enacted.  The key is to stay a step ahead of the impacts caused by policy changes and by preparing your financing before any market shifts.

Q. What is the global growth outlook for 2020?

A. Elizabeth Rust - Until recently, the global growth situation for 2020 was looking stronger than for last year. In January 2020 the IMF forecast 3.3% global growth for the year, up from an estimated 2.9% growth rate in 2019. The forecast improvement was driven by a brightening economic situation in several emerging markets – primarily Turkey and Brazil.

However, at the ABCC conference panel “It’s the Economy” on February 4, I stated that there were two major downside risks to this cautiously optimistic story: 1) an ongoing global manufacturing slowdown, which has not yet bottomed out, and 2) China’s economic slowdown, which was worsening rapidly with the spread of the novel coronavirus. In just a few weeks, it is clear the coronavirus has ever greater potential not only to knock several tenths off global GDP growth, but even bring large swaths of the global economy to a complete standstill.  Based on what is already happening in China, it seems unlikely that China’s economy will grow faster than 5% in 2020 under even the most optimistic scenario. China’s economy accounts for a third of global economic growth and is the linchpin for supply chains across Asia and indeed the world. The hit to global growth will be significant. And that’s not even accounting for the coronavirus’ potential to shut down other major economies like Italy and South Korea, where the virus has recently spread.

Q: What impact has Brexit had on trade?

A: David Chmiel - One of the challenges we face in understanding the impact of Brexit on trade is that we don’t actually know the terms on which the UK and the European Union will trade in the long-term. While the UK has now left the EU, it’s in a transition period through to the end of 2020. Negotiations on the new, permanent trade deal have, so far, highlighted large gaps in positions rather than resolving issues. UK Prime Minister Boris Johnson has pledged that he will not extend this period and doing so could create problems for him within his governing Conservative Party. Hence, the risk remains that the trading relationship could revert to WTO terms (including tariffs) at the end of 2020 and remain in place until a deal is finally brokered.

There are also questions about the longer-term political and economic direction of an EU minus the UK, which was often seen as a voice for ‘light-touch’ regulation. Will an EU without the UK pursue a more significant regulatory agenda and how will this affect negotiations on the Transatlantic Trade and Investment Partnership between the EU and the US? The ongoing saga of Brexit will not stop impacting businesses in the UK, Europe and globally for some time yet.

Q. How else is trade changing?

A. Elizabeth Rust - For the first time since the early 20th century, trade is becoming a foreign policy issue conceived in zero sum terms – rather than an economic issue understood as a win-win for all trading partners. This shift in attitudes is not confined to the Trump administration in the United States. It is a global phenomenon reflected in declining popular support for “free trade” across many societies, as well as a nationalist shift in the trade policies pursued by a number of countries, even where the United States is not involved. What does trade policy as a “foreign policy” issue look like? At the SFNet ABCC “It’s the Economy” panel, I outlined a few characteristics of this new trade policy paradigm. For one, the theory of “comparative advantage” – the idea, stemming back to David Ricardo, that countries should specialize in certain products and industries for export, and import all other goods/services from countries offering the best price – has rapidly fallen out of favor among political leaders. In its place, countries will now to seek to advance “national champions” – favored companies and industries that a country supports through subsidies, regulatory exemptions, and other market interventions – to help project their power on the world stage. The United States has recently advanced policies designed to contain the Chinese telecom firm Huawei’s growing market share in part because Huawei is understood to be a national champion. Going forward, we should be prepared to see countries erecting more trade and regulatory barriers designed to prevent other countries’ national champions from selling their products in the domestic market. Expect to see supply chains break and shrink, as manufacturing and other industries are brought “closer to home.” A company leader should no longer expect to compete fairly on the global market based purely on global demand for the company’s products.

Q: What is the political landscape for 2020? What impact does that have on your economic outlook?

A: David Chmiel - The geopolitical landscape in 2020 can be summed up in one word: volatile. If we have learned anything in the past decade, it is that political forces we thought had been relegated to history have reasserted themselves – and with great capacity to disrupt global economic activity in the process. Globalization has created a much more integrated and interdependent world but that, in turn, means that even highly localized political events can have much wider impact than was previously the case.

There is strong evidence that the economic, political and national security worlds are interacting with ever-greater regularity. You cannot, for instance, look at the long-term prospects for the US-China trading relationship without recognizing that the two countries eye each other with increasing suspicion as strategic competitors. This is reflected in the fact that so many economic policies in both countries – from tariffs to foreign investment review laws are now couched in national security terms.

We also shouldn’t underestimate the potential for climate change activism to grow stronger in 2020. Climate change activists around the world have adopted much more assertive measures. In the past few weeks, for example, the Canadian freight and passenger rail systems have been virtually brought to a halt by protesters demanding cancellation of energy infrastructure projects. When you combine that with growing pressure on institutional investors to divest assets in industries such as oil and gas, you can see the potential for disruption and capital reallocation.

Finally, we must be conscious that, in a world in which politics are so fractious, any economic slowdown is a political risk in and of itself. Globally, there is deep popular distrust in institutions of government, business and the media. Mismanagement of weakening economic circumstances could amplify existing voter sentiment and drive support for populist movements or, where democratic means are not available, to civil unrest.

Q: How do you think populism will change the economic landscape in 2020?

A: David Chmiel - In Europe, 2019 saw populist political parties on both the left and the right make significant gains in elections for the European Parliament at the expense of traditional centrist parties. Moreover, populist parties continue to garner varying degrees of support in national governments, particularly in places like Poland and Hungary. President Macron in France also continues to face protests – sometimes violent – against his reforms of the French social welfare system which he has said are critical to that country’s economic future. Until there is evidence that voters in Europe are turning back to the political center, populism will remain a force of potential disruption in European politics.

Of course, 2020 is a US presidential election year and it may prove to be one of the least predictable and conventional in recent history. Most candidates for the Democratic nomination for President are running on platforms that are among the most interventionist we’ve seen in decades. Does that portend an underlying shift in US political dynamics? Would a re-elected President Trump alter his policy priorities, knowing that he didn’t have to fight for re-election in 2024?

We also need to be conscious of political, economic and social events that could serve as future catalysts for changes in political leadership, much as the financial crisis of 2008 did. Global economies are confronting systemic challenges ranging from climate change to automation and pressures on social welfare systems from changing demographics. Many multinational financial institutions are raising concerns that large levels of corporate debt could trigger another financial crisis in the event of an economic slowdown. These are all factors driving the long-term prospects for populism and how governmental policy is formulated to address voter sentiments.

Q: How can asset based lenders help clients navigate the changing landscape?

A: Jeffery Wacker – Asset based lenders can provide deep industry expertise because we work with so many clients across so many different sectors. We can offer a big-picture perspective on shifting policies and provide advice on how best to prepare financing to navigate macroeconomic uncertainty. We can also help companies who are adjusting their business to address a changing landscape, and we can provide growth capital for companies who can turn changes in trade and tariff policies into growth opportunities.