Ominous Signals for World Trade Growth

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Buffeted by the trade war declared by US President Donald Trump and by what more and more looks like a significant downturn in China’s economy, trade weakness is likely to extend into the first quarter of 2019, according to the WTO’s latest World Trade Outlook Indicator.

“The simultaneous decline of several trade-related indicators should put policy-makers on guard for a sharper slowdown should the current trade tensions remain unresolved,” the WTO said in a prepared release.

That said, President Trump over the weekend said he would extend the March 1 deadline to continue trade negotiations and that tariffs are unlikely to be increased soon.

Wang Tao, an economist with the Hong Kong-based unit of the Swiss investment bank UBS held out hope that a trade agreement could well be reached once Trump and Chinese leader Xi Jinping meet.

‘Our best guess of what a deal could contain,” Wang wrote, “is that the US will stop raising tariffs on Chinese imports, will continue the dialogue and impose less-severe sanctions and restrictions on Chinese companies.”

Wang predicted that China would voluntarily increase imports of goods and services, reduce tariff and non-tariff barriers on US imports, open its domestic economy to more US and foreign companies, take concrete action to enhance intellectual property protection, enforce the ban on exports of the potent drug fentanyl and keep the renminbi relatively stable.

If Wang is right, that would hand a major political victory to the US president. It is also an indication, as other economists have suggested that the Chinese government, facing deep structural problems including industrial overcapacity, a massive housing glut and problems with its massive trillion-dollar Belt and Road scheme, is negotiating from a position of relative weakness, while the US economy is booming.

But, Wang wrote, “No matter how far-reaching (or not) the potential trade deal might be, we do not see US-China trade relations (or general relations for that matter) returning to the conditions before the trade war. Most of all, the US will likely further restrict Chinese investment in the US and China's access to technology and high-tech products in the coming years. Also, we expect the US to use the possibilities of increasing tariffs, financial sanctions or cutting China's access to technology as important tools to enforce any trade agreement.”

That doesn’t necessarily mean the global trade environment is healthy. The most recent WTO outlook indicator reading of 96.3 is the weakest since March 2010, according to the WTO, and below the baseline value of 100 for the index, “signaling below-trend trade expansion into the first quarter.’

Component indices appear under pressure from heightened trade tensions, with export orders (95.3), international air freight (96.8), automobile production and sales (92.5), electronic components (88.7) and agricultural raw materials (94.3) all showing deviations from the trend, ”approaching or surpassing previous lows since the financial crisis. Only the index for container port throughput remained relatively buoyant at 100.3, showing on-trend growth.”

The loss of momentum in the outlook indicator “highlights the urgency of reducing trade tensions, which together with continued political risks and financial volatility could foreshadow a broader economic downturn,” the WTO said.

The world trade body had already downgraded its forecast in September 2018 amid escalating trade disputes and tighter credit market conditions. Trade growth, the WTO said, is currently forecast to slow to 3.7 percent in 2019 from an expected 3.9 percent in 2018, “but these estimates could be revised downward if trade conditions continue to deteriorate.”

Nonetheless, if indeed Trump and Xi can pull of an agreement, “greater certainty and improvement in the policy environment could bring about a swift rebound in trade growth.”