We highlighted two US-related risks in our political outlook for the year. The first was that pre-election populist Trump would re-emerge following a period of pragmatism, especially as the mid-term election approached in which the Republicans could lose both the House of Representatives and the Senate. The second was that US-China trade tensions would escalate.
The two are of course inextricably linked. The President’s populist anti-globalisation message is strong on the “unfairness” of free trade and that it’s time to put America first.
It was not surprising that the initial US proposals for tariffs on $50 billion of imports from China was met with equal-sized retaliation. Everybody knows how this works – tit is usually quickly followed by tat. And just to ram home the political nature of the whole thing, China’s retaliatory measures were designed to hit the Trump voter base of car factory workers and soy bean farmers hardest.
White House Chief Economic Advisor Larry Kudlow went to some lengths last week to explain the fact that the tariff announcements thus far are not a done deal and will only go into effect if wider negotiations fail. But even Mr Kudlow appeared side-swiped on Friday (NZT) by the President’s announcemant that he was asking the US Trade Representative to consider tariffs on an additional $100 billion of Chinese imports (‘tit’).
If the Chinese Government’s ‘tat’ takes the form of matching the value in US dollar terms, this potentially has more impact on the prices paid by Chinese consumers, because the total value of Chinese imports from the US is much smaller than the value of US imports from China.
The President is running a high risk strategy. The escalation runs the risk of going too far and ending up in a situation that is difficult to pull back from, resulting in real economic damage. To use another well-worn trade cliché – no one wins in a trade war. China is a significant importer of soy beans and higher prices will hit poorest households hardest. And as much as the US administration is trying to avoid consumer products in their tariff targets, the further this goes it seems inevitable that higher tariffs will hit US consumers in the pocket.
We don’t see it going that far, but we become slightly less confident on that view with each successive tit or tat. And we are assuming a rational, pragmatic outcome. Part of the problem is no-one, least of all the Chinese, are aware of what the US President actually wants out of this.
The process this far is unsettling for markets, especially given the further it goes the harder it gets to dismiss the US President’s tariff announcements as simply a negotiating strategy ahead of talks on investment flows and intellectual property.
The biggest problem for us here in New Zealand is Mr Trump’s apparent disregard for rules-based trade arrangements. As a small open exporting country, we rely heavily on the rules and the oversight by the World Trade Organisation (WTO) as the official arbiter of those rules. A breakdown of the rules risks our future prosperity.
Last week, President Trump declared that the WTO is an ‘unfair’ institution that favours China. Added to the US withdrawal from the (CP)TPP, agreement, this suggests that multi-lateral trade agreements are going to become ever-scarcer and therefore bi-lateral deals will be of even greater importance. So, the message for New Zealand trade diplomats is likely to be “get negotiating”.
Promoting bi-lateral deals can, however, become a minefield, as the tension with the UK raised by New Zealand’s possible interest in initiating talks with a Russia-led trading bloc recently showed. Multi-lateral institutions exist in order to avoid this kind of geopolitical influence-peddling where larger nations lean on their smaller partners for political rather than economic reasons. However, the tide seems to be going out on globalisation, and trickier and more treacherous trade currents is one of the consequences.
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