19 September 2019

The Next Trade Wars

These are very difficult times for international trade.  In fact, when looking at the overall environment for international trade since the outbreak of the global financial crisis in 2008, this is certainly the most difficult longer-term period for international trade since the 1930s and the 1940s.  Even after the global economy managed to pull itself out of the worst part of the global financial crisis, international trade growth has been subdued at best and certainly has not been able to return the levels seen in previous decades as globalization and the reconnection of major countries such as China and India to the global economy led to soaring growth rates for international trade.

Now, two major factors are threatening to lead to a serious decline in international trade in the coming months. First is the simple fact that the global economy is slowing and therefore, demand levels are falling, or at the very least stagnating, in nearly every major export market.  Alone, this would be a normal situation in which trade growth slows along with the economy.  However, the situation today is anything but normal, at least from the standpoint of the globalized world that has emerged over the past few decades. This is due to the fact that international trade is being jeopardized by the notable rise in support for protectionist policies in many of the world’s leading economies, a development that has seen trade barriers being erected, or being threatened, by many major economies. Even the United States, the country that largely built and maintained the modern world’s system of international trade, has seen a surge in protectionist sentiment, one that has led the US’ current government to use trade barriers as a formidable weapon against its perceived rivals.  As a result of this combination of falling demand and rising protectionism, the world economy stands on the precipice of a major crisis.

Recent years have seen the rise of many serious trade disputes, but none is more important and more consequential than the ongoing trade dispute between the United States and China, the world’s two largest economies.  For the Trump Administration in the United States, tariffs and other trade barriers are the weapon of choice when it comes to rebalancing the US’ trade relationship with China, not to mention blunting China’s rise as the one country that has the potential to challenge US economic and political leadership in the coming decades. Furthermore, the US and many other countries have accused China of using unfair trading practices to gain at the expense of others, hence the large amount of support for the US’ stance towards China in recent years.  This trade dispute has been highlighted by a series of escalating tariffs, with the US usually implementing new or higher tariffs on Chinese imports and with China following suit on US imports a short time later.  Recently, the US announced that it would delay the implementation of some additional tariffs on Chinese imports by a couple of weeks in order to allow for new trade talks between the two countries to make progress, but the fact is that both countries appear to be prepared to add additional trade barriers in the coming months.

Given the vast scale of their economies and the fact that the two countries alone account for more than 40% of the additional economic output that is generated on an annual basis worldwide, it is easy to see why the US-China trade war is the focal point when it comes to international trade today.  However, the US-China trade war is not the only significant trade dispute that has arisen in recent years, nor is it the only one that threatens to weaken the global economy in the coming months and years.  In fact, protectionism is a popular sentiment not just in the United States, but in many areas of the world.  One of the leading concerns surrounding the dispute between the US and China is that it would lead to a proliferation of trade disputes around the world, and there is ample evidence that this is indeed what it happening. Here are just a few of the many other trade disputes that are currently threatening to add to the pressure facing international trade and the health of the global economy:

United States-European Union: Since he took office in 2017, United States President Donald Trump has been highly critical of the European Union, in particular Germany and its trade surplus with the US.  While the US’ trade deficit with the EU is much smaller than its trade deficit with China, US exporters see much lower opportunities for growth in the EU given Europe’s low levels of economic growth over the past decade or more.  Meanwhile, rising protectionist sentiment in the EU has led to trade barriers also being erected on that side of the Atlantic. For example, the EU’s efforts to tax tech firms, most of which are from the US, has angered many officials in Washington, leading to threats of retaliatory trade barriers being erected against imports from Europe.  If the two sides cannot find common ground on these issues, the potential for a full-scale trade war between the US and the European Union cannot be ruled out.  For the US, this would be painful, but for Europe’s export-dependent economies, the harm to their economies would be immense.

United States-Mexico: Another favorite target of the Trump Administration has been Mexico, as evidenced by the forced renegotiation of the NAFTA free trade agreement (now known as the USMCA) and the repeated threats to impose escalating tariffs on Mexico if that country did not do more to stem the flow of migrants attempting to reach the United States from Central America.  While Mexico has indeed taken steps to successfully reduce the number of migrants crossing its territory (and winning the praise of President Trump in recent weeks), the fact remains that this uncertainty in its trade relationship with the US has caused considerable harm to the Mexican economy.  With 80% of its exports going to the United States, few countries are more dependent upon a single market for their growth as Mexico is on the US market.

Japan-South Korea: Despite being overshadowed by other trade disputes, the worsening standoff between Japan and South Korea, the world’s third- and eleventh-largest economies, is also proving to be highly destabilizing for those two important economic hubs.  This dispute is a product of the fraught relationship between Japan and South Korea, stemming from Japan’s colonization of Korea from 1910 to 1945 and Japan’s use of forced labor and “comfort women” during this period. When South Korea’s highest court ruled that Japanese firms should compensate Korean victims of these practices last year, this latest trade dispute began.   In recent months, Japan has moved to restrict the export of many vital products to South Korea and even removed that country from its most-favored trade partner list.  As tensions between these two countries are likely to remain high, this dispute has the potential to escalate in the coming months.

European Union-Mercosur: When the European Union and the Mercosur trade bloc consisting of Brazil, Argentina, Paraguay and Uruguay finally signed a free trade agreement earlier this year, it marked the culmination of 20 years of difficult negotiations.  However, since the deal was reached, relations between some individual member states of both blocs have deteriorating dramatically. Most notably, Brazil’s right-wing government has clashed with a number of European governments over the accelerating pace of deforestation in the Amazon Basin, leading some EU member states to threaten to either halt agricultural imports from Brazil or to block the trade deal between the EU and Mercosur.  Meanwhile, a potential trade dispute is emerging within Mercosur itself, with Brazil threatening to leave that bloc should the left-wing candidate in next month’s national election in Argentina, Alberto Fernandez, win the presidency there, as is expected.

These aforementioned trade disputes, along with many others, could prove to be disastrous for the global economy. Already, global economic growth has slowed in recent months, due in no small part to the trade disputes that have sapped consumer, business and investor confidence.  Worse, the outlook for the global economy is expected to continue to deteriorate in the coming months, with nearly all of the world’s leading economies forecast to record even lower rates of growth over the remainder of this year and in early 2020.  For those countries that are exceedingly dependent upon exports to generate economic growth, the next few months could prove to be extremely challenging, especially if these trade disputes were to escalate even further. What is certain is that the global economy is not in a position to be able to shrug off the effects of these trade disputes and is now in a more fragile position than at any time since the global financial crisis.