The Great Unravelling

The trade war is spawning an increasingly chaotic global trade environment, where the old conventions about sticking to the rules and using quiet diplomacy to solve problems seem to be unravelling.  That is not good news for New Zealand – or for the many other small states in the global system. 

August has been a month of the fast and the furious in international trade.  President Trump announced at the start of August that he would be imposing new tariffs from 1 September on the balance of US$300 billion of Chinese imports, although later deferred some of the tariffs, including on popular consumer items like smartphones, to December – likely to avoid hitting Christmas purchases.   China in turn announced last week that it would be retaliating on US$75 billion of US imports.  President Trump then declared that the new tariffs he had already announced would increase even more, and (via tweet) ordered US companies to pull out of China. 

Christmas tariff surprise

By December, assuming the tariffs all go ahead, the average US tariff on Chinese imports will be around 26 percent, up from 3 percent when Trump took office.  In effect, US consumers and manufacturers will be paying for this – one estimate puts the additional cost per US household at $1,000 per year.  China, on the other hand, has said it will raise its own tariffs on US goods (particularly agriculture), to cover around two-thirds of total US exports to China, while lowering tariffs for others.   

“Our challenge for the coming period will be to try to knit at least some of the threads together again”

Uncertainty is the biggest stumbling block…

Of the many unfortunate impacts of the trade war, the most obviously damaging to the global economy has been the corrosive effect of uncertainty: business and investors hate unpredictable markets and supply chains. The IMF has estimated that trade war uncertainty will cause the world economy to contract by $455 billion next year, or 0.5 percent of global GDP; other estimates put it at $585 billion by 2021.  World trade flows are back in negative territory – and so, last month, was New Zealand’s export growth. 

…but market churn isn’t good news either…

For New Zealand exporters, the trade war will mean market churn – while for some products there could potentially be short-term windfall gains (for example, for exports such as beef or dairy to China, filling the gap left by the US), in the main, the dislocation of established trade patterns across the region is likely to do more harm than good.   The main theatre of operations, the Asia-Pacific, takes nearly three-quarters of our exports, accounting for fifteen of our top 20 export markets.

…and nor is the growing appetite for trade restrictions

However perhaps more deeply worrying for New Zealand is the effect that the trade war seems to be having on global mindsets.   The global prosperity of the last thirty years has been grounded in clear operating assumptions: global rules exist; everybody follows them; if there are problems, there are fair mechanisms to solve them; and the system works best when countries engage constructively.  In the current belligerent climate, those assumptions seem less self-evident.

Countries now appear less inhibited about reaching for tariffs as a first response.  A raft of trading partners retaliated against US steel tariffs with their own tariffs on US exports; the EU has likewise signaled that if the US imposes auto tariffs, it will respond in kind.  More recently, President Trump threated to impose tariffs on French wine in response to a new French tax on digital services, prompting threats of EU counter-retaliation.    There has also been a flare up of a bitter trade dispute between Japan and Korea, which may at least in part reflect broader geostrategic as well as geoeconomic concerns raised by the trade war.

The Art of the Deal

It has also been a long-established GATT/WTO rule that giving preferential market access to one trading partner is only permitted under certain conditions, notably a comprehensive FTA.  (Only agreements covering “substantially all trade” are permitted as exceptions to the WTO’s MFN principle, which otherwise requires trading partners to be treated even-handedly.)  However, earlier in the month, the idea of post-Brexit US-UK sectoral micro-deals emerged; earlier this week, the US and Japan reached a bilateral deal in principle to liberalise access for US beef and other agriculture products into Japan (along previously-agreed TPP lines) in exchange for the US not raising tariffs on Japanese autos.   It is a stretch to see how these deals could meet the GATT bar. 

The Great Unravelling

Although very concerning, in fact the tit-for-tat of August comes on the back of a global trend towards increasing protectionism.  So far this year, 618 new harmful trade measures have been introduced, but the US and China are together responsible for less than one-quarter of these.   This is deeply worrisome for New Zealand, along with the many other small and medium-sized states in the global system.  It seems that it won’t be enough to keep our heads down and ‘stick to our knitting’: our challenge for the coming period will be to try to knit at least some of the global threads together again.

This post was prepared by Stephanie Honey, Associate Director of the New Zealand International Business Forum.