How worried should we be about trade wars?
Over the weekend, the Asia-Pacific Economic Cooperation (APEC) Summit in Port Moresby laid bare the increasing tensions between the US and China. Trade and rivalry over the two countries’ relative standing in Asia dominated the agenda.
The rhetoric was so harsh that in the end APEC was unable to agree on a communiqué, citing the unwillingness of China and the US to agree on trade language. The APEC gathering may well have been a harbinger of things to come in Buenos Aires, when the leaders of the G-20 hold their summit at the end of the month.
In January this year, US President Donald Trump started imposing tariffs on steel and aluminum (10 and 25 percent, respectively), then honed in directly on China, imposing a 10-percent tariff on $250 billion worth of imports. The Trump administration threatened to increase those tariffs to 25 percent and even put levies on a further $265 billion worth of Chinese goods.
China is not the only country in the dock. Trump managed to renegotiate the North American Free Trade Agreement (NAFTA) deal with Canada and Mexico, which is now called the US-Mexico-Canada Agreement. It gives US agricultural producers greater access to the Canadian market, and ensures wage levels and North American content for goods imported to the US.
Trump may have had a point demanding that NAFTA needed renegotiation, because some aspects had become outdated. Globalization came at the expense of jobs in the rust belt. At the APEC Summit, Malaysian Prime Minister Dr. Mahathir bin Mohamad conceded the danger of globalization and disruptive technologies leaving some nations and segments of society by the wayside.
Trump may have a point regarding China’s unfair practices when it comes to inward investment and intellectual property, but tariffs and rhetoric will not solve those issues.
This was quite an acknowledgement given that his “Look East” policy of the 1970s and 1980s, which provided the foundation to Malaysia’s economic rise, depended heavily on trade.
All of the above arguments may have some validity, but the way in which the trade renegotiations were introduced had economic costs. Business will become a lot more expensive for US companies if and when their supply chains become more expensive. This will affect both domestic consumers and US exports to third countries.
Regarding NAFTA, we should not forget that 25 years have created realities: Supply chains consist of components that are shipped back and forth between the three countries, each journey adding value. This holds especially true for the automotive sector. Supply chains are intricate things that cannot be unpicked overnight. Some six million US jobs are directly linked to NAFTA.
Trump may have a point regarding China’s unfair practices when it comes to inward investment and intellectual property, but tariffs and rhetoric will not solve those issues. The US is the world’s largest economy, but even big players become stronger when they are able to forge alliances.
Herein lies the problem with the current approach: It is built on “Make America Great Again,” which seems to have a zero-sum approach and bilateralism as its foundation. Trade is all about win-win situations and multilateralism. The world needs an organization that can manage those complex multilateral relationships and act as an arbiter. The World Trade Organization (WTO) is precisely that arbiter. In that sense, it is disconcerting when the US undermines the organization. (As a side note, the US has been one of the main beneficiaries of WTO-negotiated arbitrations.)
There may be validity in shaking things up in boardrooms and on relatively simple projects, but when we deal with the world’s trading system, caution may be the order of the day. Many world leaders and Christine Lagarde, managing director and chairwoman of the International Monetary Fund (IMF), have warned time and again that the heavy rhetoric and trade sanctions may undermine global growth.
The evidence is that the rhetoric alone has done so. The IMF shaved 0.2 percent off its global growth forecast for both 2018 and 2109. The synchronized growth scenario of January this year, which had all economies growing in tandem, has become desynchronized.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources