Trump goes to Davos while NAFTA grinds on, the dollar tumbles, and uncertainty reigns. Robert Antoshak, managing director at Olah Inc, tries to unravel what it might mean – if anything – for the textile and clothing sector.
The Global Economic Forum in Davos just concluded. The exclusive gathering in Switzerland of the world elite; a who’s who of the wealthy and well-connected, covering the gambit from political and economic leaders to prognosticators, to prominent academics, to the media. American presidents don’t usually attend the event, but Donald Trump did, presumably to smooth ruffled global feathers over his often-inflammatory rhetoric about trade and globalisation.
Other than a “fake” news crack or two, Trump was comparatively tame, staying on script about the strength and attractiveness of investing in the American economy. Reports suggested he worked the crowd to show he can be reasonable and business-oriented. According to The New York Times, “the combative nationalist gave way to the let’s-make-a-deal businessman.”
“I believe in America,” said Trump during his address to the Davos participants. “I will always put America first,” he continued, “but America first does not mean America alone.” This does not imply that Trump has miraculously become a globalist – far from it, as Trump continues to spend considerable energy questioning or renegotiating trade agreements. In his first year in office, he has questioned the validity of the WTO, while pulling the US out of the TPP agreement, and embarked upon an extensive renegotiation of NAFTA. In fact, while in Davos, trade officials from Canada, Mexico and the US met for the sixth round of negotiations to rework NAFTA.
Trump has blamed trade agreements such as NAFTA for shortcomings in the American economy. Despite Trump’s rhetoric, however, the American economy has gained steam over the past year, building on steady – if somewhat tepid – growth in the years since the global recession of 2008. Indeed, while Trump was in Davos, the Commerce Department announced that the US economy grew 2.6% during the fourth quarter of 2017, not quite hitting expectations of many economists, but decent growth nonetheless.
The other bit of news out of Davos came from his Treasury Secretary, Steven Mnuchin, who said it was time for a weaker US dollar, which would be “good for us as it relates to trade and opportunities.” After Mnuchin’s comments the dollar slid even further on global markets, accelerating its recent downward slide. Take a look:
According to the Federal Reserve, since early 2017 the dollar has fallen 9% against a broad grouping of currencies, but the recent slide follows a 27% increase since 2014 explained the Financial Times. Nevertheless, assuming the dollar continues to weaken, prices for goods imported into the US could rise as 2018 unfolds, while exports of many American products may become cheaper for foreign buyers.
A cheaper dollar has ramifications for our industry. The price of cotton, for instance, has risen in recent months in part due to higher demand for US cotton priced in depreciating dollars. There’s a good correlation between the weakness of the dollar and higher cotton prices, as the following graph shows:
For sure, if cotton prices continue to move up, it’s only a matter of time before synthetic fibre prices step up as well. The last time we had this kind of price inflation in the fibre markets was back in 2011 when the price of cotton soared to $2 per pound, leaving mills and apparel brands scrambling to cover their costs. Moreover, if US apparel prices are any indication, prices offered at wholesale are only going down – setting up the potential for a real price crunch, when coupled with rising raw material costs:
For our industry, then, a weaker dollar is a looming threat on the horizon and represents an essential consideration for global textile and apparel supply chains over the next year – assuming, of course, that the dollar continues to weaken against other major currencies. But there’s another, equally worrisome, threat: Trump’s trade policy.
Attempting to follow US trade policy these days is an act of futility. Uncertainty abounds. Some observers suggest it’s a sign of incompetence, while others say it’s a sign of an emerging strategy to realign the US economy in the world. It’s conceivable that a weak dollar may lie at the heart of US trade policy. Moreover, the Trump administration’s approach to trade has not only leveraged uncertainty but has also underscored its unpredictability so far by stressing confrontation in dealing with major trade partners.
Confrontation on trade may be part of some grand strategy emanating from the US trade representative (USTR). Trade is a tricky topic. Previously, US presidents adopted a more collaborative approach to settling trade disputes. So far, the Trump administration seems more intent on acting from a position of self-perceived ultimatums than utilising a nuanced trade policy. For example, the recently announced Section 201 actions against China on washing machines and other products, along with its ongoing Section 301 investigation into alleged Chinese intellectual property violations illustrate a hardline approach to trade. Section 201 and 301 of US trade law goes back to trade legislation from 1974 and has not been utilised by the US since the advent of the WTO.
One would think that with this approach to trade, why would Trump go to Davos? It only adds to the confusion. His visit seemed to suggest an engagement with the global trading elite, while in reality, it may have been nothing more than obfuscation. Which, in the final analysis, may be part and parcel of Trump’s overall strategy on trade.