US President Donald Trump's protectionist policies pose a significant risk to global trade and may lead to a strong dollar and lower oil prices,, Bank of America Merrill Lynch (BofAML) said on Wednesday. Analysts at the bank said protectionism pursued by the US could lead to retaliation and an ensuing trade war, which would severely hurt demand for crude, with prices falling back at $60 per barrel by year-end after a mid-year surge to $70.
"A sharp downturn in trade due to US and UK protectionism is a key risk to the world economy. With the elasticity of trade to global growth running at just one compared to 1.5-2 prior, protectionist policies could slow trade further and hurt oil demand," they said. Measures like a border adjustment tax, coupled with an increasingly hawkish US Federal Reserve, would likely lead to a much stronger dollar and lower oil prices down the line, analysts said.
"Moreover, while oil prices have seen support recently from the Opec deal last November, prices in local currency are approaching 2014 levels," BofAML said, adding that demand in emerging markets could suffer as a result. The bank retained its forecast for 2017 global oil demand growth of 1.2 million barrels per day and its mid-year Brent target of $70 per barrel.
A decline in oil demand could be partly offset by a US review of Iranian sanctions; however, BofAML said the likelihood that President Trump will cancel the Iran Deal is overstated. Another possible headwind to oil price recovery is Trump's pledge to unlock a $50 trillion shale oil and gas revolution and boost development of low emissions coal technology for electricity. The Energy First plan was outlined as the top priority in President Trump's first action statement after being sworn into office. While the Trump administration may deter international firms from tapping into Iran's substantial oil resources - the world's fourth largest at 158 billion barrels - more friendly relations with Russia "could result in meaningful changes related to the current sanctions regime," the report said.
BofAML analysts predicted that emerging market currencies and their economies could suffer from cheaper currencies overall. "Global trade has already suffered dramatically in recent years growing at an average of 3.7 per cent since the global recession compared to almost double that in the six years prior." Analysts fear that with Brexit and Trump, the conventional global economic order is being turned upside down. The US and Britain, both of which have been at the vanguard of free markets, are steering toward policies that prioritise their own countries-while nondemocratic China is acting like a champion of globalisation. During the annual meeting of the World Economic Forum in Davos, Switzerland, last Tuesday, China's President Xi Jinping stressed the importance of free trade. Economists are concerned that the Trump administration lacks tolerance.
Trump has shown intolerance for the US trade deficit with other countries, pointing the finger at China, Mexico and Japan. His countermeasures under consideration include imposing higher tariffs on imports from those countries and forcing companies to increase investment and create more jobs in the US while ramping up purchases of US-made products.
The second concern is that Trump is inconsistent. He appears keen to destroy Obama's legacies, having moved on his first day as president to repeal his predecessor's health care law, known as "Obamacare," and drop out of the Trans-Pacific Partnership.
Analysts fear that if the US unilaterally raises tariffs and restricts imports, it would violate the rules of the World Trade Organisation. However, Trump, who sees the multinational framework as having deprived many Americans of jobs and wealth, may disregard the existing rules and international institutions in which the US has been actively involved. - issacjohn@khaleejtimes.com
Published: Thu 26 Jan 2017, 9:22 PM
Updated: Thu 26 Jan 2017, 11:30 PM
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