Rod Oram: A darkening outlook for global trade
With the US on a protectionist trajectory and a 'no deal Brexit' just around the corner, a chilling economic and political storm is engulfing global trade, writes Rod Oram.
On Wednesday, our Reserve Bank along with its counterparts in India and Thailand made unexpectedly sharp cuts in their official interest rates as trade tensions grow and economic conditions deteriorate around the world.
The two latest anxiety escalators are China’s currency falling below the psychologically important level of seven yuan to the US dollar and the rising probability the UK will crash out of the EU without an exit deal on October 31.
These mark a significantly negative shift in the global trade landscape. Protectionism is on the rise; fair and free trade is increasingly threatened; the willingness of countries to resolve their differences internally and externally is declining; dispute resolution systems are atrophying and increasingly ignored; and international trade is weakening as a driver of economic growth.
Needless to say we’re deeply affected given exports and imports are crucial to our economic well-being. While our two-way international trade is still flowing smoothly, many of our trade diplomacy goals such as an upgrade of our free trade agreement with China and a free trade agreement with the US are looking increasingly unlikely to be achieved.
“Potentially, and more alarmingly than you’ve been reading day-by-day, the US is on a genuinely protectionism trajectory,” says Charles Finny, a former NZ trade negotiator who is now a partner with Saunders Unsworth, the Wellington government relations and public policy consultant.
And Stephen Jacobi, a former trade diplomat who now heads the NZ International Business Forum (and used to run the NZ US Council) says a free trade agreement with the US "is now completely out of the question.”
“The world used to count on the US as an advocate for multilateral trade. But the Washington policy environment has completely changed. It has shifted way back to bilateralism and protectionism,” Jacobi says. Thus, in our FTA negotiations with the US it would demand greater access for US drug makers to our market, while denying us increased access to its dairy markets. Neither proposition would be acceptable here to business, the Government and the public.
Two fierce foes
President Trump has been a passionate believer for more than 30 years in tariffs and other trade restrictions. His latest imposition of tariffs on China from September 1 will take the average US tariffs on Chinese imports to 21.5 percent from 3.1 percent in 2017, says the Peterson Institute for International Economics.
The trade war is causing new Chinese investment in the US economy to dry up. It fell to US$5.4 billion in 2018 from a peak of $46.5b in 2016, a drop of 88 percent. Preliminary figures for the first four months of this year suggested only a modest uptick, with transactions valued at US$2.8b.
“The trade war is reaching the point where it becomes a significant drag on the US economy,” says economist Paul Krugman. “The Fed probably can’t offset the harm the trade war is doing, and is probably getting less willing even to try.”
Such a chilling of trade and investment would put downward pressure on any country’s currency as a natural adjustment to relative values. In China’s case, its central bank exercises a managed float of the yuan against a basket of 24 currencies. The US dollar (and other currencies pegged to it) account for only 30 percent of the basket. But the greenback has an outsized influence on the thinking of Chinese businesses and investors and politicians in the US and China.
Thus, the Chinese decision to let the yuan slip this week below seven to the US dollar sharply aggravated tensions between the two countries. It has fallen 10 percent in the past year, back to levels last seen at the start of the Global Financial Crisis.
Beijing blamed the US’s increasing protectionism; in reply Washington accused China of manipulating its currency. However, under the US Treasury’s “enhanced monitoring” system, a country has to have a significant bilateral trade surplus with the US, a material current-account surplus, and to have made a “persistent, one-sided intervention in foreign-exchange markets”. In China’s case only the first condition applies; and it had been trying to keep the value of its currency up not down.
An even stranger departure by Washington from the facts are suggestions from time to time by Trump and some of his officials that the US might weaken its currency in retaliation to the fall of the yuan and euro. That’s an odd suggestion for a country that prides itself on the strength of its currency. Anyway, the US administration has very few ways to affect the dollar’s value; and as the world’s de facto reserve currency, it always strengthens at times of global economic and political stress.
Over the next decade, say, they could split the world into two spheres of influence each demanding fealty to them, posing a huge challenge to other countries seeking reasonable relations with both.
Trump says he doesn’t believe the two countries will settle their trade issues before next year’s Presidential election. But if the Chinese are hoping a Democrat will replace him, they should be careful of what they wish for. With two possible exceptions, the crowded field of Democrat contenders are far less supportive of international trade than past Democrat presidents.
Anyway, China’s state capitalism and communist political system is sharply at odds with the US’s flawed democracy and rampant capitalism, a gulf probably too wide for the two countries to learn to bridge. They are now fierce competitors. Over the next decade, say, they could split the world into two spheres of influence each demanding fealty to them, posing a huge challenge to other countries seeking reasonable relations with both.
Meanwhile, China and the US continue to sideline the World Trade Organisation and its dispute resolution system. They are ignoring all suggestions of how to resolve their complaints about the WTO in general, and in particular about appointing new people to its appellate body that hears disputes. Lacking them, the body is about to cease to function.
New Zealand is involved with other countries in two initiatives to revitalise the WTO. David Walker, our ambassador to the WTO, leads the efforts to revive the appellate body; and NZ is a member of a group working on wider reforms.
And then there's Brexit ...
The appellate body is about to become critical to us. Whichever way the UK exits the EU, the two have already agreed to split the existing EU dairy and meat tariff quotas between them. This would seriously disadvantage our exporters who would have a good case to take to the WTO.
It looks ever more likely the UK will crash out of the EU without an exit deal on October 31. The economic damage has already begun. Just one example is the steep plunge in foreign investment in the UK car industry over the past two years, and the sharp drop in car production.
In terms of preparing for massive trade disruption, most large companies have spent heavily on planning, systems and stockpiles to help them through. But only 14 percent of smaller companies have, even though 41 percent of them are expecting a negative impact from Brexit, according to a recent survey by the Federation of Small Business.
The Confederation of British Industry recently released its analysis and advice on a no-deal exit entitled What Comes Next? There’s helpful information in it for any NZ companies exporting to or importing from the UK.
And the Financial Times reported recently on the main areas of dislocation and costs for the UK and other EU members of a no-deal exit.
NZ Trade & Enterprise has been running a number of programmes here and in the UK to help NZ companies prepare for Brexit and is considering doing more workshops in the next couple of months. The best way to plug into its advice, led by its London-based staff, is this page on its website.
While some new opportunities for us might emerge in free trade agreements with the UK and the EU, those will be some years away given the turmoil of Brexit. And even then, they are likely to be less beneficial than originally hoped for because of the increasing political turmoil globally over trade. Likewise, our FTA upgrade talks with China are struggling with the Chinese offering no improvement on access for dairy and wood exports, and NZ offering no more concessions on investment here.
Events this past week were another squall in the fast deepening economic and political storm engulfing global trade.