So the Polls got it wrong again - the American people have spoken decisively, if unexpectedly, just as the people in the United Kingdom did at the Brexit vote. Mr. Trump has pledged to make the USA great again. Will he also make the US paper industry great again?
By the time you read this column, and over the month or so that it will appear in Paper Money, much of the dust will settle but speculation will likely intensify ahead of the inauguration. Confirmation of personnel in the administration will heighten or quell the reality of the election rhetoric, but most pundits believe that the new president will have to follow through on his key promises, such as the wall at the Mexican border.
I will get to consequences for the paper industry shortly, but I want to share the analysis of an English friend. The entrails of this election will be inspected and dissected endlessly by those same experts who did not see this result coming, but my friend in the UK saw the Brexit result coming. His analysis strips away all the pseudo-scientific analysis. This person has no qualifications as an economist or sociologist, but is a keen observer of humanity. He says in part "Hillary Clinton was rejected in favor of a man who has promised to restart coal-mining and the American steel industries and build the odd wall or two. To be honest I wasn't in the least surprised for two reasons: the first because when we were recently in the States, outside of the cities, particularly in rural and small town Pennsylvania, all the bill boards were for Trump, none for Clinton. Secondly, because it was exactly the same sentiment in the UK, which produced Brexit. Non-metropolitan England rejected the opinions of the experts, of metropolitan London and voted to 'take control of our borders' ".
At the macroeconomic level, we know that the immediate reaction on world financial markets was, and will continue to be, irrational. Markets will attempt to anticipate, and price in, expected policy changes. So in the run up to the inauguration, there is likely to be volatility. The world as we know it did not end after Brexit but, like the new presidency, it has not happened yet. Nevertheless, the UK currency has taken a hammering, which has mixed blessings, making imports more expensive and exports more attractive. It came too late to save some significant UK paper manufacturing enterprises and, indeed, until the exit conditions are confirmed, no one really knows how it will spin out in the long term.
Certainly day one after the US election again confounded the experts. The Australian Securities exchange (and Asian markets) fell heavily ahead of the election due to the "Trump Slump" but roared back the day after and kept going. The Dow and S&P did the same.
The new administration will have Republican control of Congress for at least the next two years and therefore the potential to invoke fundamental changes reaching well into the future. There is a lot we do not know, but some things we do. The Economist magazine predicts "Mr. Trump's policy platform could be stimulative in the medium run. Though his economic plans have never been comprehensively detailed, a few things are clear. First, Mr. Trump would cut taxes dramatically. His tax cuts would mostly benefit the rich, which would limit the boost to demand somewhat, but a large increase in the government deficit could not help but give a jolt to the economy. At the same time, Mr. Trump seems likely to increase spending on defense and on infrastructure (and, possibly, on a wall, which would seemingly count as both)." The plunge in the Mexican peso perhaps gives a hint to the future, not so much because of the wall, but the threat of a 35% tariff on imports from Mexico.
The Economist goes on to speculate that the status of many international institutions is now in question. New trade deals are unlikely, and existing ones might well be revisited or abandoned. It seems certain that the TPP (Trans Pacific Partnership) will be consigned to oblivion, but probably no one really cares. The expectation is that there will be a stimulus to local manufacturing through a range of measures, including trade barriers.
Under this scenario, if manufacturing returns to the USA with strengthened trade barriers, there is potential for parts of the US paper industry to flourish (particularly packaging) and for others to receive a stay of execution, such as the printing and writing sector. In the short term that could be good for profits, but it is also likely to encourage economic nationalism elsewhere, with retaliatory responses that could undermine the long-run growth potential of the American economy and depress the international economy.
Europe (with or without the UK) has been consolidating its own economy and, at a trade level, is probably indifferent to the USA. Security alliances and global economic impacts may be a totally different matter.
As it has been for more than a decade now, the elephant in the room is China. Among his election promises, President Elect Trump threatened to launch a trade war against China, declaring it a "currency manipulator," and to impose tariffs of up to 45% on Chinese exports to the USA; which he can do under existing legislation.
The impact for Australia and New Zealand may not be positive. Most of our manufacturing has gone into or is in terminal decline. It does not matter a lot whether our iPhones are manufactured in China or the USA, but we do care if these already costly devices increase significantly in price.
The newly installed Australian Reserve Bank Governor Phil Lowe summed up concerns in the typically understated language of bankers after giving a speech recently, noting that: "the possible election of President Trump, I suspect, would not be seen as a benign event in the same way that Brexit had been".
There has been a free trade agreement (FTA) between Australia and the USA for over a decade but the Australian paper industry may be surprisingly vulnerable, despite something of a purple patch over the past year for the packaging sector.
As previously reported, Australia was a significant exporter of cut-size paper to the USA but was effectively cut out of that market by US dumping laws. These laws provide an effective mechanism for dealing with competitive imports, if a claim is made that the imports are being sold at "dumped" prices, irrespective of an FTA. That was a stimulus for the sole Australian manufacturer to win back market share locally, at the expense of China and Indonesia, who were also largely locked out of the USA. The final chapter is far from written as those displaced products search for new markets.
Australia is also a significant exporter of containerboard to the USA. Orora and Pratt ship about 85,000 metric tons of recycled paper annually to feed their US corrugator plants. Pratt also ships more than 50,000 metric tons of KLB to the USA to supplement its recycled containerboard manufacturing capacity. Will these exports be at risk if tariffs are imposed?
Economists say that increasing tariffs could actually trigger a recession in the US. In any event, it does raise the question of what the practical impact would be. US voters will feel vindicated by the jobs created with a resurgence of US manufacturing, but will they accept the significant increase in the cost of many consumer products that may result?
One way or another China will seek to sustain its growth trajectory - it has no choice. If the USA is significantly closed as a market there will be consequences, and not all of them good for the USA.
So, will Mr. Trump make the USA paper industry great again also? If the packaging paper industry prospers, as it might in the short term, will it really make much difference in the other sectors? We might find the answer to that question sooner than we think.