Trade war will have no winners
US tariffs, pressure on NZ home loan rates — yes, there is a link
President Donald Trump is conducting US trade policy with all the finesse of a water buffalo in an operating theatre. His capricious imposition of tariffs on imports of steel and aluminium is a dangerous development.
It could trigger a trade war of escalating tit-for-tat retaliation, which will do no one any good. “Trade wars are easy to win,” Trump declared. “We can do stupid, too,” said European Commission President Jean-Claude Juncker.
Alternatively, in the end it might not launch a trade war, if the list of countries successfully pleading for exemption grows to the point where it makes little difference.
But in that case, the absence of a price to pay will only encourage more of the same behaviour. That outcome has been rendered more likely by the departure from a shambolic White House of former Goldman Sachs grandee Gary Cohn, leaving the field to advisers who share Trump’s primitive view of international trade, like Peter Navarro, director of the National Trade Council and author of
Death by China, and Commerce Secretary Wilbur Ross.
The grounds Trump invoked for the tariff, using dead letter legislation from the early 1960s, is national security.
It is transparently spurious. More than half of the imports which would be subject to the tariff are from US allies: Canada (until it was, perhaps temporarily, exempted), the European Union, South Korea and Japan.
Global over-capacity in steel and aluminium is a real problem, usually blamed on Chinese over-investment in those industries.
But analysis by the highly regarded Petersen Institute for International Economics points out that as of the end of 2017, more than 60 per cent of US steel imports were already covered by anti-dumping or countervailing duties, including 94 per cent of Chinese imports. Similar measures on aluminium have restricted China’s share of US imports of that metal to 10 per cent.
So instead of marshalling an international coalition to press Beijing to address overcapacity, the Trump Administration has opted to antagonise long-standing friends and allies.
Invoking national security represents an end run around World Trade Organisation disciplines on trade remedies to address economic harm like dumping. It sets an odious precedent.
Trump is evidently indifferent to the impact of tariffs on US businesses which use steel or aluminium, and ultimately on American consumers.
He refers constantly to bilateral trade gaps and appears to regard a deficit as an indication that the trading partner is taking advantage of the United States. The complexities of border-crossing value chains in an ever more integrated global economy evidently elude him.
The US runs a current account deficit of more than US$100 billion a quarter, equivalent to 2.1 per cent of gross domestic product. The tally was US$450 billion in the year ended September 2017.
While the current account deficit is measured by trade and investment income flows, economists can demonstrate with a bit of algebra that it equals the gap between domestic investment spending and domestic saving. So long as that imbalance persists, the US will run an external deficit.
In New Zealand’s case, the deficit reflects lousy saving rates in the household sector; in the US it is more the government sector.
A current account deficit has to be balanced by a capital inflow. The surplus US dollars accumulating in the rest of the world, as it sells more to the US than it buys from it, get recycled. Their only value, ultimately, is to buy something from or in the United States.
This largely takes the form of foreign purchases of US government debt. On Treasury Department figures, the stock of US government debt held by foreigners grew by US$300b over calendar 2017, to an eyewatering US$6.3 trillion or around 30 per cent of the total.
Two-thirds of it is held by official entities like central banks, rather than foreign private investors, and a third of it by two countries, China and Japan, with more than US$1 trillion each. The combined holdings of EU countries are of a similar order.
Uncle Sam is a voracious borrower. In the 2017 fiscal year, the federal deficit was two-thirds of a trillion dollars. Following passage of the regressive and procyclical tax cut late last year, and further spending boosts since then, it is estimated that the budget deficit will exceed US$1 trillion or 5 per cent of GDP in the coming 2018-19 year.
In these circumstances, trade policy that alienates countries which substantially fund the US government might not be the smartest thing to do.
The conventional view is that it is not in the interests of large holders of US government bonds to drive yields higher through an investment strike, as that would reduce the value of their existing holdings.
But that sanguine view assumes they care. Does President Xi Jinping dread the prospect of mass unrest if the balance sheet of the People’s Bank of China takes a hit? I suspect not.
At this week’s auction of US treasuries, yields for the 10-year paper, which have already risen by nearly half a percentage point this year, hit a four-year high of 2.88 per cent, Bloomberg reports.
It is a trend which has already triggered a wave of angst in US and global sharemarkets last month.
And because of our abject reliance on importing the savings of foreigners, it has implications for the mortgage belt in New Zealand.
The external accounts that Statistics NZ released on Wednesday put banks’ offshore borrowings at $138b. That is equivalent to a third of their loan book.
Borrowers have had the benefit of exceptionally low global interest rates, and on top of that the spread, or risk premium, between New Zealand and US 10-year bond yields is the narrowest it has been for nearly 20 years.
Both of those things are liable to change, putting upward pressure on banks’ cost of funds and, ultimately, mortgage rates.
Trade policy that alienates countries which substantially fund the US government might not be the smartest thing to do