Are fears of Great Depression tariff slump overblown?
FEARS of a trade war may seem overblown but they are real enough for 1,100 US economists to warn of the adverse effects of protectionism as suffered in the Great Depression of 1930.
There is no depression now; is it too far-fetched to bring up the subject?
Arguing that “a tariff war does not furnish good soil for the growth of world peace”, the economists cautioned against rising prices for US consumers.
The initial knock-on effects on costs and business decisions are already seen. US factory activity has slowed for the second straight month in April, against rising commodity prices as tariffs were slapped on steel and aluminium imports.
In seeking a permanent exemption from the tariffs, the European Union (EU) had complained that the current temporary exemption only prolonged business uncertainty.
While China’s factory growth edged up in April, exports shrank for the first time since November 2016. Against trade war risks, this is considered a “worrying sign”.
Some think that this fear (of a potentially recurring depression) is not overstated. Trade barriers and counter-actions by its trading partners had resulted in the US taking a longer time to pull itself out of the depression.
“The US economy is now operating under a gradual tightening of interest rates and liquidity, which can have a dampening effect on consumer and business spending.
“Any unwarranted trade shocks are least welcome (even as the US economy is expected to fare better in the second quarter),” says Lee Heng Guie, executive director, Socio Economic Research Center.
“A full-blown tariff war between the two largest economies would be disastrous; history suggests that there are no winners,’’ says Thomas Yong, CEO, Fortress Capital.
US-China trade talks in Beijing ended with key differences unre- solved; rising Treasury yields (making borrowing costs higher), other costs and commodity prices have led to concerns on margin compression.
In a trade war, workers in construction, transportation, retail, banks, hotels, utilities and other professionals would “clearly lose”, while “farmers would be doubly hurt – paying higher prices for imported goods and seeing export options curtailed”, said Bloomberg, quoting the economists in their letter.
The letter, organised by the Washington-based National Taxpayers Union, reflects a similar letter sent 88 years ago which failed to convince US lawmakers against the passing of the Smoot-Hawley Tariff Act in 1930.
That had raised the already high tariffs in the US, and was a key reason for the trade war that had worsened the economic slump.
Currency wars during the Great Depression had led to competitive devaluations. “It became a lose-lose posturing and led to tensions all round.
“The same thing is happening now; the US on one hand, and China and the EU on the other, glaring at each other,’’ says Inter-Pacific Securities head of research Pong Teng Siew.
The difference now is that the gold standard (where a currency’s value is linked to that of gold) has been replaced by the dollar standard (the current international standard following the collapse of the gold standard).
(Under the gold standard, countries cannot overspend as they cannot increase money in circulation without increasing gold reserves which grow very slowly.
(To combat the Great Depression, the US cut the dollar’s ties to gold, which allowed the government to pump money into the economy).
“(With the dollar standard), the US can now technically continue to suffer a deficit for a further period although that window is closing fast. The US is seeing its debts to foreigners and its own citizens mounting,” says Pong.
Its spending may be curtailed. ‘’An end to quantitative easing (printing of money) is necessary to prevent loss of confidence in the dollar; the consequent rise in interest yields may also crimp the ability of the US public sector to spend,’’ says Pong.
Amid a slowdown, can emerging markets weather through? They will be supported by resilient domestic demand, private investments and fiscal efforts but there are concerns that being mostly commodity exporters, they will be affected by lower prices especially of soft commodities.
“Exports of manufactured goods are also expected to be slow; in February, Malaysia’s exports contracted by 2%, which may be seasonal, but the trend of slowing exports is at work,’’ says Pong.
A pick-up in the second half due to the electrical and electronic sales cycle may be expected, says UOB Kay Hian head of research Vincent Khoo.
Even with ringgit weakening, stronger export receipts may be negated by loss of reserves on outflows of hot money as rate differentials favour the dollar.
“The export surge in the first half of 2017 was not followed by a surge in reserves, unlike in 1998/99,’’ says Pong.