Global growth the vic­tim of trade fric­tions

China Daily (USA) - - VIEWS -

Be­fore the G20 Sum­mit in Buenos Aires, 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.

Af­ter Buenos Aires, the White House said that, af­ter a “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 agreed to put on hold new tar­iff in­creases. The White House said China has agreed to start pur­chas­ing sub­stan­tial US agri­cul­tural, en­ergy, in­dus­trial and other prod­ucts from the US to re­duce the trade im­bal­ance; and that the US and China agreed to try to reach an agree­ment on sev­eral trade is­sues “within the next 90 days”.

The first im­pres­sion is that the Xi-Trump meet­ing may have achieved a crit­i­cal truce, de-es­ca­la­tion of ten­sions, and pos­si­bly a path to­ward a long-term com­pro­mise.

Re­cently, the World Trade Out­look In­di­ca­tor of the World Trade Or­ga­ni­za­tion sug­gested that trade growth is likely to slow fur­ther into the fourth quar­ter of 2018 and be­low-trend trade growth in the com­ing months. Since the on­set of Trump’s tar­iff wars in the spring, el­e­vated uncer­tainty has haunted the global econ­omy.

Ac­cord­ing to WTO, mer­chan­dise trade vol­ume growth was ex­pected to reach 4.4 per­cent in 2018, which is still be­low the 2017 level. But Trump’s tar­iffs are likely to fur­ther weaken the out­look. Ac­cord­ing to the United Na­tions, global in­vest­ment flows were pro­jected to re­sume growth in 2017 and sur­pass $1.8 tril­lion in 2018. Thanks to US neo-pro­tec­tion­ism, they fell to $1.5 tril­lion last year and cur­rent sta­tus quo looks gloomier.

Three sce­nar­ios il­lus­trate the ris­ing eco­nomic stakes of Trump’s tar­iff wars that have rapidly ex­panded from a bi­lat­eral trade con­flict to a po­ten­tial global trade war. In July, the US and China im­posed 25 per­cent tar­iffs on $34 bil­lion of each other’s im­ports and levies 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 China’s GDP and 0.2 per­cent of the United States’ GDP, re­spec­tively.

In the “Amer­ica First” sce­nario, the stakes will quadru­ple to $200 bil­lion, with soar­ing col­lat­eral dam­age. In China, it could shave off 0.4 per­cent of GDP; in the US, 0.8 per­cent of GDP.

If the stakes of the White House’s tar­iff war were to es­ca­late to $500 bil­lion — Trump’s 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.

What im­pact will these trade fric­tion sce­nar­ios have on global growth prospects?

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 tar­iff truce start­ing in early 2019. But it is also pred­i­cated on suc­cess­ful 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, 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 global econ­omy. Global prospects would dampen as the world’s 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 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 Ross to in­ves­ti­gate the ef­fects of steel im­ports on na­tional se­cu­rity — and that be­came the first shot in the bi­lat­eral trade con­flicts last spring.

With the truce, the “mud­dling through” sce­nario pre­vails mo­men­tar­ily, but it can eas­ily re­verse to es­ca­la­tion, even a global trade war.

If the White House and the Congress fail to achieve a com­pro­mise in the US trade fric­tions, the com­pli­ca­tions would weaken global eco­nomic out­look for years to come. The au­thor is the founder of Dif­fer­ence Group and has served as re­search di­rec­tor of in­ter­na­tional busi­ness at the In­dia, China and Amer­ica In­sti­tute (US) and a vis­it­ing fel­low at the Shang­hai In­sti­tute for In­ter­na­tional Stud­ies (China) and the EU Cen­tre (Sin­ga­pore).

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