Donald Trump obviously took the lead in the transition from trade liberalization to globalization to protectionism and fragmentation.
The commercial cycle is turning, as is the global economy. But there is a new reversal. With the sharp decline in global trade growth since the global financial crisis of 2008-2009, a significant increase in protectionism and changes in global supply chains is more problematic. There is a clear possibility that the reversal of an already weakened business cycle can free up the surprisingly rapid deterioration of the global economy.
Early proposals for such an outcome are visible in the January update of the World Economic Forecast of the International Monetary Fund. Although the IMF cut its forecast for 2019 on the global GDP growth by 0.2 percentage points (from 3.7% to 3.5%), it achieved a very small decrease in the GDP growth projection. 4% of global trade. This is really disturbing. In the climate of higher tariffs between the United States and China, with threats to continue to grow, and given the risks to the trade in the euro area in connection with Brekit, There are good reasons to expect significant revisions downward in the perspective of global trade.
This would be particularly problematic given that the support that global economy receives from global trade is on an unstable ground. After a 10.4% fall in the global trade volume in 2009 – a record in the modern era – recovery has fallen. After a short two-year recovery in the period 2010-2011, global trade growth averaged only 3.6% between 2012 and 2018, which is about half the average annual rate of 7.1% in 20 years before the crisis.
There is a debate about why global trade growth has slowed down significantly in recent years. Extensive research published by the IMF at the end of 2016 attributed the slowdown, largely, to the moderate spending of capital companies, and found only the small effects of protectionism. However, the world has changed a lot in the next two years. While the decline in capital spending is still present, there has been a significant increase in protectionism, with consequent pressures on global supply chains. As a result, the conclusions of the IMF are under review.
The administration of President Donald Trump has clearly taken the lead in terms of shifting from liberalization of trade and globalization to protectionism and fragmentation. The phrase in Trump's inaugural speech says: "Protection will lead to great prosperity and strength." The rhetoric quickly launched the action and immediately followed the withdrawal of the United States from the Trans-Pacific Agreement, the replacement of NAFTA by T-MEC with higher costs (an agreement between the United States, Mexico and Canada) and, of course, a series of tariff increases in relative to China. The withdrawal of the Paris Agreement on Climate, the threat of withdrawal from the World Trade Organization, and the complaint of NATO's involvement are putting an end to the separation of the United States from multilateralism and the global trading system that has so long defended it.
In this context, the Chinese slowdown that is rapidly developing is much more problematic. While recent data on GDP indicate a slight slowdown at the end of 2018, monthly data show that a sharp fall in sales in retail discretionary consumer products, such as cars and mobile phones, was recorded in December. In response to this deterioration in domestic demand, Chinese imports fell 7.6% in 12 months that ended in December, a 180-point worsening after a 16.1% increase in 2017. Chinese exports declined by 4.4% in December, while weaknesses related to tariffs on US markets finally have counterproductive effects.
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Clearly, according to the results of trade negotiations between the United States and China, there could be more bad news for Chinese exports to the United States. Moreover, while China acts aggressively to counteract the cyclical decline in domestic activities, it could take several months before its policy measures come into force. In the meantime, risks still indicate a decline in demand for Chinese imports. This highlights the key risk for the latest IMF forecast: China is the largest exporter and the second largest importer in the world. Its negative impact on the already weakened global trading cycle is only beginning to become apparent.
The disruptive effects of Brekit can only aggravate this problem. The Eurozone, in its entirety, is located immediately behind China among world's exporters and above China as the second largest importer in the world. Bearing in mind that exports to the United Kingdom account for about 3% of the EU's GDP – significantly higher in the case of Belgium, Ireland and the Netherlands – friction created by Brekit in global trade can not be taken lightly.
After all, the global business cycle faces significant stress in 2019, and cuts are just beginning. This highlights the risks of a significant decline in global GDP growth. In a world that is still very much connected, no important economy will be an oasis. This includes the United States, whose president 45 continues to insist that it is easy to win a trade war. Maybe not.
Former President Morgan Stanley Asia, author of the book "Imbalanced: the Co-responsibility of America and China", among other things.
Copiright: Project Sindicate, 2019