Why a global trade war can never end well
Brexit and trade wars have two things in common: One is that they are a little bit like a Mexican telenovela, where the plot meanders along repeating itself endlessly in various instalments. Two, they are both bad for the economy.
The last instalment of the trade-war saga played out in Buenos Aires over the weekend, where the finance ministers and central bank governors of the G-20 nations had their annual meeting.
When they gathered in Whistler in late May, there were already what could be called trade skirmishes being fought around the world.
Yet these now appear to be developing into a full-blown trade war, something that was front and center at the Buenos Aires meeting — despite trade only being mentioned in passing in the communique issued afterwards.
A sign of how the trade war has escalated came on Friday, when US President Donald Trump said he was ready to impose tariffs on all $500 billion of imported goods from China. China is concerned that Trump might make good on that threat, with the leadership plotting behind closed doors how it would retaliate.
The Europeans have demanded that the US does not impose tariffs on the automotive sector, which would particularly hurt the German and French economies. Pierre Moscovici, the EU commissioner for economic and financial affairs, made it clear that the EU would retaliate with its own measures. French Minister of Economy Bruno Le Maire went further, declaring that there was no real incentive for the EU to engage with the US on trade as long as the tariffs on steel and aluminum remained in place.
Meanwhile Steven Mnuchin, the US secretary of the Treasury, was very much his master’s voice, claiming that the EU’s retaliatory tariffs on whiskey, Harley Davidson and other goods were only affecting isolated pockets and did not really hurt the US economy, which is just doing just fine, thank you.
While the rhetoric was less dramatic than in Whistler, there was increased fear of where the trade disputes would lead. Christine Lagarde, the IMF chief, issued a statement in which she urged for trade conflicts to “be resolved via international cooperation without resort to exceptional measures.”
All of the above played out against the backdrop of the US president ratcheting up the rhetoric back in Washington. He accused China and the EU of manipulating their currencies to help their exports. It is true that the Chinese yuan, Japanese yen and euro have weakened against the dollar. However, that has a lot to do with the Federal Reserve hiking rates (potentially four times this year and three times in 2019) and the ECB and the Bank of Japan not doing so for now. Trump is going down a very dangerous path if he tries to politicize the decisions of his central bank, which his criticism implicitly does. Over the past decades the US economy has been well served by the Federal Reserve’s independence.
Trade and maybe even currencies have become increasingly politicized since Donald Trump assumed the presidency.
All in all, the G-20 gathering in Buenos Aires may have come across as more convivial than the Whistler meeting, but the dark clouds of protectionism continue to gather. A storm in the form of full-blown trade wars would be very bad for the global economy — not least for the US. According to a recent IMF study, a further tit-for-tat over trade could shave as much as 0.8 percent off the US economy’s growth rate.
Trade and maybe even currencies have become increasingly politicized since Donald Trump assumed the presidency. While the global economy is still growing, we have seen some impact. Gone is the goldilocks environment, where all the world’s economies grew simultaneously. We still see solid growth rates, but they diverge between countries and regions and some emerging markets have been negatively impacted. Lagarde has a point when she warns of the ramifications of a global trade war. Slower growth or even recessions have real-life impacts on real people, their jobs and wellbeing.
All economies would be affected by trade wars — including those in the Gulf. Such countries are reorienting their economies away from oil, and will need a solid global trade regime to export their new products of the future. In the immediate term, these economies are still oil-based, which means they rely on global supply chains to function and trade to flow freely. Oil is, after all, the premier fuel of transport.
And so as the trade war telenovela plays out, it is clear that the ending will not be a happy one.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources