America sneezes and the world catches a cold!

Following the Sub-Prime crisis in 2008 that sent a wave of shock and paralysed global trade and led to a credit market meltdown, the global economy has revived.  As of 2018 the global markets are at an upswing and seeing unprecedented growth patterns. We are truly in the golden era of global economic growth, with global growth rates at 3 and 4 percent. But as goes the famous adage, ‘America sneezes and the world catches a cold’, the rippling effects of any macroeconomic decisions taken are felt by rest of the world. The epi-center of all business activity, the American economy and market has played a big role in shaping the world of business for the rest of us and continues to do so.

With the swearing in of their 45^th president of America, Donald Trump the M&A market has seen a downward spiral. Deals in America have declined to $ 1.1 trillion in 2017, brining global volumes down by 11 percent according to data compiled by Bloomberg. With the announcement of the American protectionist policies of 25% tariff on steel and 10% on aluminium imports by the Trump government there is the fear of global economy being impacted significantly and lowering the world GDP. The American trade partners particularly China have raised outrage with the imposition of tariffs and have retaliated by imposing counter tariffs of 15% on 120 products including fruits and other commodities. The POTUS has instructed the US Trade Representative of another $100 Billion in additional tariffs against China owing to China’s rebuttal. China holds billions of dollars of US treasury bonds, if they do not keep buying then there is a chance it could potentially bankrupt America. Additionally, China has more capacity for supply and US greater consumer demand, which could increase the imbalance between the two.

America believes that it is not in a trade war with China as it already has a trade deficit of $500 bn and are only taking these measures to protect American domestic industry, improve the trade deficit and intellectual property theft. It is believed that the imposition of tariffs is bad economic policy and the ramifications of it can be far reaching. The risks of the trade war between America and China is assumed to directly raise the costs of inputs for goods in America and dampen the interests of trade with the two countries. The European Union is looking for countermeasures for US products as they fear their jobs are threatened.

There is also a high possibility of American pulling out of the NAFTA (North America Free Trade Agreement) which could potentially have a deep global impact on trade. The world trade chains are so interlocked, that this is not just affect North American and China but the entire business world as we know it. Mexican producers and consumers would feel considerable pain. Asian supply chains are also likely to be disrupted, very few players Asia or North America would remain unaffected.

Trade is an important contributor to economic growth and a sluggish world economy could have direct implications on Mergers and Acquisitions and business around the world. In 2017, America had a total deal value of $1455.4 Billion and China the total deal value was $720.89(www.statista.com), both taking leading the way in global M&A. With such staggering numbers the aftermath of an impending trade war could have its effect on deals as feared by most experts. The major impact could be in the following areas:

• Reduced M&A activity in the M&A epicenter of America and China
• Slowed down world economic growth and world GDP as Republicans fear undermine the tax reforms intended to boost economic growth in America
• Leading source of both metals is Canada and Germany for US markets following country specific tariffs, now China accounts for very little of steel or aluminium imported into the US. A trade boycott by these EU and other world economies could be in the lurking
• EU officials are making it clear that they will retaliate against US move of imposing tariff and challenge them at the WTO
• America could find it harder to recover from counter measures taken by China and EU

The policies although not implemented yet, has had a cascading effect on stock markets and trade gurus fear the uncertain. There are talks of the policies not coming to play with China and America finding a middle ground. Trade wars more often than not end up hurting businesses and economies than do any good. In this case could backfire against American consumers and manufacturers and end up hurting the US and its relations with allies more than it would protect the steel and aluminium industries.

Author

Prakhya Bhat

Working on your latest acquisition and worried how it will go through? MergerWare will help you integrate seamlessly and ensure that the business cycles have minimal impact on the outcome of your deal. Get in touch at sales@mergerware.com