Global growth mired in trade tension


Rashid A Mughal

WITH a US-China trade truce, the ‘muddling through’ scenario prevails but can easily turn to escalation. Before the G20 Summit in Buenos Aires, United States President Donald Trump had threatened to impose tariffs on an additional $267 billion of Chinese goods. He had also indicated he would raise the existing tariff rate on $250 billion of Chinese imports from 10 percent to 25 percent on Jan 1,2020After Buenos Aires meeting, the White House announced that, after “highly successful meeting”, Trump had agreed to leave tariffs on Chinese products at a 10 percent rate after Jan 1 while China agreed to buy a substantial amount of products from the US. The US and China agree to put on hold new tariff increases. The White House said China has agreed to start purchasing substantial goods from which includes agricultural, energy, industrial and other products from the US to reduce the trade imbalance and that the US and China agree to try to reach an agreement on several trade issues “within the next 90 days”. The first impression is that the meeting between Trump and Chinese President XI Jinping may have achieved critical truce, de-escalation of tensions, and possibly a path toward a long-term compromise.
Recently the World Trade Out look indicator of the World Trade Organization (WTO) suggested that trade growth is likely to slow further in the third and fourth quarter of 2019 and below the trend/expectations of trade growth in the coming months. Since the onset of Trump’s tariff wars in the spring, elevated uncertainly has haunted the global economy. According to the WTO merchandise trade volume, growth reached 4.4 percent in 2018, which is still below the 2017 level. But Trump tariffs are likely to further weaken the outlook. According to the United Nations, global investment flows were projected to resume growth in 2018 and surpass $1.8 trillion. Thanks to the US neo-protectionism they fell to $1.5 trillion last year and the current status quo looks gloomier.
Three scenarios illustrate the rising economic stakes of Trump tariff wars that have rapidly expanded from a bilateral trade conflict to a potential global trade war. In July 2018 the US and China imposed 25 percent tariffs on $34 billion of each other’s imports and levels on another $16 billion of goods. In this $50 billion “muddling through” scenario the economic impact of the tariffs would have been limited to 0.1 percent of the United States GDP respectively. In the “America First” scenario, the stakes will quaddruple to $200 billion with soaring collateral damage. In China it could shave off 0.4 percent of GDP and in the US, 0.8 percent of GDP.
If the stakes of the White Houses tariff war were to escalate to $500 billion- Trump pre-Buenos Aires goal-the potential collateral damage would increase tenfold from the first scenario. In this global trade frictions scenario, China’s GDP could take a hit of 1 percent but that of the US would suffer a 2 percent impact. As the global economy has passed its peak- thanks to rising interest rates and global trade tensions- each trade friction scenario implies different growth prospects. In the “muddling through” scenario both full trade frictions and “America First” prospects could be avoided. A good start would be a bilateral diplomacy that will lead to positive prospects in the second half of 2019. In this case global growth prospects would remain close to the baselines of the Organization for Economic Cooperation and Development and the International Monetary Fund forecast of around 3.5 percent and 3.9 percent possibly higher if confidence can be restored.
In the “America First” scenario neither truce nor diplomacy would prevail. After spring 2019, continued friction would result in progressive disruptions in the global economy. Global prospects would dampen as the worlds GDP growth in 2019 would sink to 3 percent or below. In the global trade friction scenario, diplomacy would fail while “America First” escalation would spread across the world economy. Risks to the global outlook would overshadow world GDP growth, which would plunge to 2-2.5 percent for years to come. That would pave the way to a 1930s like scenario. After Buenos Aires, the global trade frictions scenario has been temporarily suspended. Yet the “America First” scenario has not been fully reversed.
We’ve been there before. After the XI-Trump Florida summit in April 2017, Washington and Beijing announced a 100 day “Action Plan” to improve strained trade ties. Yet only two weeks later, Trump issued a memorandum, which directed Commerce Secretary Wilbur Rose to investigate the effects of steel imports on national security and that became the first shot in the bilateral trade conflicts last spring. The reality, however, is that Trump is not winning the trade war.Rather it is proving costly for the Americans.The economists at the Fed project that a average American family will end up paying $1000 more per year in the this scenario.
What, after all, is a trade war? Neither economists nor historians use the term for situations in which a country imposes tariffs for domestic political reasons, as the United States routinely did until the 1930s. No, it’s only a “trade war” if the goal of the tariffs is coercion — imposing pain on other countries to force them to change their policies in our favor. And while the pain is real, the coercion just isn’t happening. All the tariffs Trump imposed on Canada and Mexico in an attempt to force a re-negotiation of the North American Free Trade Agreement led to a new agreement so similar to the old one that you need a magnifying glass to see the differences. (And the new one may not even make it through the Congress.)
— The writer is former DG (Emigration) and consultant ILO, IOM.