In ordinary times, worries about the health of the global economy tend to prompt leaders of the largest countries to join forces in pursuit of safety – but for sure not president Trump. These are not ordinary times.
The biggest threat to global fortunes has become the intensifying conflict between the two largest economies on earth, the United States and China. As their leaders openly contemplate how to inflict pain on each other, the rest of the world now frets about becoming collateral damage in an escalating trade war. Just recently, China and the United States appeared to be moving toward cooling their hostilities, while global economic prospects were improving. Worries about a worldwide slowdown were giving way to burnish hopes for expansion. Fears about the weakening of China’s economy were easing as President Trump advertised a soon-to-be- signed trade deal. That lifted the outlook for Asian economies dependent on global commerce, like Japan, South Korea and Taiwan. Europe, a perpetual source of concern, was flashing signs of renewal. Defying skeptics, the American economy remained on a fear.
But all of a sudden everything changed, as Mr. Trump out of the blue sharply increased tariffs on 200 billion US-Dollar worth of Chinese goods, the world found itself grappling with the likelihood that the trade war would be painful and expensive. The concern mounted as Beijing retaliated and the Trump administration detailed plans to slap 25% tariffs on virtually all goods that China sends to the United States. For businesses and consumers alike, it all raised the prospect that they would soon be paying higher prices for goods, a reality that discourages commerce.
In our opinion, an escalation scenario most probably would be terrible all around. A negative impact on trade flow is obviously going to be bad for global growth for several years. In our opinion it’s bad news for almost everybody.
If both sides follow through on their threatened tariffs, China ‘s annual economic output will be reduced by 0.8% while the United States will see its annual growth reduced by 0.3%, according to Oxford economics.
These numbers are small in the grand scheme of things, but the damage could be felt acutely within industries that are especially exposed to the trade war, such as American agriculture and Chinese electronics manufacturing. The weakness was underscored by the latest indications that China’s economy is slowing and by lower-than-expected figures for retail sales and factory orders in the United States. The harm in our opinion could be especially severe for countries that are the most dependent on trade, including Japan, Malaysia, Mexico and Singapore. At the center of trouble sits China, the world’s most populous country. Its breakneck development over recent decades has added hundreds of millions of consumers to the global marketplace while supplying a vast assemblage of low-cost goods.
Given that China is the source of roughly 1/3 of the world’s economic growth, any disruption to its trade amounts to a global event.
Mr. Trump has designed his tariffs to wound China as he seeks to pressure its leaders to agree to cease subsidizing state-owned companies, stop demanding intellectual property from American businesses and open its markets to foreign competitors. Until recently, the president was insisting that a trade deal with China was imminent. Then, he abruptly accused China of reneging on its commitments and opted to increase tariffs. The sharp escalation comes at an especially fraught time for the world economy, Jeopardizing what had seemed to be a stabilizing, if gradually slowing, Chinese economy.
Volumes of freight imported by China surged in April according to an analysis of data by UBS, the global investment bank. Worldwide, airfreight was up in March compared with a year earlier, according to the International Air Transport Association. But these trends in our opinion are fragile. Airfreight has declined nearly 4% since its peak in 2017. Outside China, manufacturing in Asia has been slowing for much of the last 2 years. A trade war between the United States and China – two countries that collectively account for roughly 40% of world economic output – would almost certainly aggravate the situation. Exports to China from Japan, South Korea, Taiwan, Thailand and Vietnam have plunged by about 14% over the past year, or about 6.3 billion US-Dollar. Those same countries have lifted their exports to the United States by a similar percentage. But the United States is a less important trading partner and increase amounts to less than 2 billion US-Dollar.
In Europe, the trade war presents another unwanted source of concern at a time of tenuous progress. Concerns that Britain’s unruly departure from the European Union would damage trade across the continent had abated – at least in the immediate term as London and Brussels agreed to extend their fractious divorce proceedings until the end of October.
Germany, Europe’s largest economy,, had been moderating fears of weakness with data showing an increase in factory orders and exports Germany’s exports to China were up by more than 5% in March compared with a year earlier. But much of what Germany sends China amounts to the components of China’s industrial apparatus -car ports, engines electrical machinery and other gear folded into factory operations. If Chinese factory operations slow in the face of American tariffs, China’s appetite for German goods will probably wane.
In Italy and France, industrial activity has been weakening in recent months. for Europe, this trade war is happening at a very delicate point in time. The trade war has already spooked global stock markets, prompting plunges in share prices in recent days. If investor fear deepens, money will almost certainly flow into the ultimate haven, the American dollar. That would probably be accompanied by money leaving so-called emerging markets, exacerbating crises in Argentina and Turkey, while bringing down the value of currencies more broadly, from Brazil to South Africa to India.
Falling currencies make imported goods more expensive in these countries, forcing poor people to pay more for food, fuel and transportation. After rising early this year currencies and stock prices across emerging markets have dipped precipitously in recent weeks. The key question in our opinion now is how long trade hostilities will endure. It is a question with no clear answer. Mr trump appears to be taking resolve from a strong American economy as he declares a willingness to absorb the strains of a drawn – out battle with China. The unemployment rate is at 3.6%, its lowest level in half a century. The economy expanded at a 3.2% annual rate during the first three months of the year. Mr. Trump has declared that the United States can win a trade war if it stays the course. Yet he has also used Twitter to complain that the Federal Reserve is not cutting interest rates while China’s leaders stimulate their economy with injections of credit.
Perhaps that represents his lobbying for lower rates. It can also be read as an admission that Mr. Trump lacks-and-covets-tools possessed by his adversaries in Beijing. Who enjoy domination of the levers of policy. Mr. Trump’s strategy appears to be stoking nationalist anger in China, where the Communist Party leans on such sentiments for propaganda purposes. That could harden China’s willingness to hold its position, as its leaders fear the consequences of gratifying an attack from the American leader.
All of this is not a recipe for expanded global trade, which grew by about 4% in 2017, then slowed the 2% last year and may contract this year.
Once growth in trade volumes turns negative – please get prepared – it makes us all have to take a closer look at some sort of recession scenario. We at Calvin • Farel currently are taking this look.
Things are looking more disconcerting for sure. In our opinion the downside risks are increasing.