WTO Sounds Alarm on Global Trade

The World Trade Organization is warning that US President Donald Trump’s trade war and the slowing global economy are leading to a downgrade in forecasts for trade growth over 2019 and 2020, with merchandise volumes now expected to rise by only 1.2 percent this year, substantially off the 2.6 percent growth forecast in April.

President Trump, who famously said in 2018 that trade wars are good and easy to win, also may be having second thoughts in the face of the decelerating economy, which is expected to slow from 3.0 percent annually in 2018 to 2.1 percent in 2019 and further to 2.0 percent in 2020 and 1.9 percent in 2021 according to the Federal Open Market Committee. The trade war is denting somewhat his popularity with farmers who have lost millions in soybean and other sales, particularly in red districts that delivered the electoral college to him in 2016 although many continue to hold out hope he can even the playing field with other countries.

China, however, indicated on September 26 that tensions may be abating when the government announced that it is buying a “considerable amount” of soybeans along with a range of other imports in response to the Trump administration’s decision to free a list of Chinese products from tariffs. Among items taken off the tariff list by the administration are plastic soda straws, which environmentalists are seeking to ban and which have become a Trump bugaboo with the president grousing that paper ones collapse.

It is uncertain if this signals a bigger easing in the trade war, which has played havoc with supply chains, driving companies out of China into the arms of Vietnam and other Southeast Asian countries.

Certainly the White House doubled down on its pugnacious trade policy on October 2, announcing that – aided by a WTO decision to allow the US to impose tariffs on up to US$7.5 billion in European goods – it would impose 25 percent tariffs on EU agricultural exports and 10 percent on European-brand aircraft on Oct. 18 over subsidies to Airbus and to agricultural exports.

The damage to US manufacturers from the administration’s policy has been considerable and it has produced little change in the merchandise trade deficit, which actually has widened slightly in 2019 as exports to China have continued to contract. According to a June 19, 2019 analysis by Reuters, Apple blamed the trade war for falling first-quarter iPhone sales, Intel cited slowing demand in China for a cut in its revenue forecast, Ford, Chrysler, and General Motors projected extra costs for commodities, Harley-Davidson said it was shifting production of some units outside the US, to Europe, Winnebago said it faced at least US$10 million in added cost pressures, Caterpillar and John Deere & Co listed costs in the hundreds of millions of dollars, Archer Daniels Midland Co said it was hit hard by losses over sorghum and soybeans.

Soybean manufacturers and meatpackers in Brazil saw their exports soar, with JBS, the world’s largest meatpacker, recording a 24 percent increase in 2018 against under 21 percent in 2016 and 2017.s

Nobody knows at this point what Trump can wring out of China. But economist Mark Weisbrodt, with the Washington, DC-based Center for Economic Policy Research, said Trump’s political base “doesn’t care all that much about his fight with China. If he makes a deal and declares victory without gaining anything significant, as happened e.g., with Mexico and the European Union — there is little reason to suspect that he would get any more trouble from his base than he got in those episodes. Especially since he is not even fighting for things that might benefit them.”

If he succeeds, for example, in getting China to reduce the conditions that it imposes on US firms investing there — such as sharing their technology — this would only encourage more US corporations to move their production from the US to China, Weisbrodt said.

As Weisbrodt points out, Trump faces considerable political risk in continuing the trade war given the visible damage it is causing to sectors of the economy that helped to elect him and that continue to believe in him.

In any case, according to the WTO, it may be too late. “The darkening outlook for trade is discouraging but not unexpected,” according to their analysis, quoting WTO Director-General Roberto Azevêdo, also on October 1. “Beyond their direct effects, trade conflicts heighten uncertainty, which is leading some businesses to delay the productivity-enhancement. Job creation may also be hampered as firms employ fewer workers to produce goods and services for export."

The updated trade forecast is based on consensus estimates of world GDP growth of 2.3 percent for both 2019 and 2020, down from 2.6 percent previously.

“Slowing economic growth is partly due to rising trade tensions but also reflects country-specific cyclical and structural factors, including the shifting monetary policy stance in developed economies and Brexit-related uncertainty in the European Union. Macroeconomic risks are firmly tilted to the downside,” the WTO report notes.

Although there is a high degree of uncertainty associated with trade forecasts under current conditions, the report notes, “the estimated growth rate for world trade in 2019 is placed within a range of 0.5 percent to 1.6 percent. Trade growth could fall below this range if trade tensions continue to build, or outperform it if they start to recede. The range of likely values is wider for 2020, ranging from 1.7 percent to 3.7 percent, with better outcomes depending on the easing of trade tensions.

Risks to the forecast are heavily weighted to the downside and dominated by trade policy, the report notes, saying further rounds of tariffs and retaliation “could produce a destructive cycle of recrimination. Shifting monetary and fiscal policies could destabilize volatile financial markets. A sharper slowing of the global economy could produce an even bigger downturn in trade. Finally, a disorderly Brexit could have a significant regional impact, mostly confined to Europe.”

An index of new export orders derived from purchasing managers' indices has fallen from 54.0 in January 2018 to 47.5 in August 2019, the weakest reading since October 2012. At the same time, the report notes, an index measuring aspects of monetary, fiscal and trade policy uncertainty has risen to its highest level ever. “To the extent that economic uncertainty deters investment, it can have a disproportionately negative effect on trade since capital goods that make up investments tend to have high import content.”