Global trade: Towards a messy, costly and unknowable end-game

By Sharon Wood 21 May 2019

Republican US presidential candidate Donald Trump reacts to the crowd while appearing at a campaign rally in Norcross, Georgia, USA, 10 October 2015. EPA/ERIK S. LESSER

Trump’s high-stakes negotiations with China could well prove the tipping point into a new trade era. Until then all eyes will be on the stop-start talks and risk-on, risk-off financial market gyrations. Meanwhile, the end-game is virtually impossible to predict and the likely costs difficult to quantify.

It’s difficult to see a neat and orderly wrapping up of the US-China trade negotiations anytime soon. Policymakers, businesses, consumers and investors will thus need to equip themselves to operate in less than ideal conditions, namely a protracted period of uncertainty, volatility, stop-start high stakes negotiations and risk-on, risk-off financial market conditions.

For South Africa, this is particularly bad timing given that its economic and financial fortunes are so sensitive to global events and our strategic economic turnaround has hopefully just begun.

It also means that financial markets are going to be buffeted by every headline on the trade front, with many investors responding to short-term developments rather than keeping an eye on the long-term game.

Can we predict the long-term world trade outcome with any certainty? Not really, but the one thing we can say with reasonable confidence is that the era of multilateralism is winding down and that bilateral – and regional – trade agreements are set to predominate globally from here on in, egged on by Donald Trump’s America-first bent.

This resurgence in bilateral or regional trade deals has been underway for some time, but the fraught US-China negotiations currently underway could well prove the tipping point into a new era, one in which countries are pitted against each other in highstake trade negotiations and the worst characteristics of bilateralism predominate.

This will be a fundamental departure from a trading system described by UN Deputy Secretary-General Amina Mohammed as open, equitable and of benefit to all. He summarised the benefits of multilateral trade as a driver for broad-based economic growth and sustainable development, creating jobs, promoting investment, spreading technological progress and lifting people out of poverty.

But that is all set to change with the unexpected events on the trade front last week. You might well ask, how did we get to this unnerving tipping point? Charles Hankla, Associate Professor of Political Science, Georgia State University, sums up how he sees it: “In essence, the United States under Trump has begun to see itself as the victim, rather than the guarantor, of the liberal trading order. This new perspective has made American negotiators more willing to extract temporary concessions from trading partners, even when these come at the cost of destabilising the system as a whole.”

As we contemplate this new state of being, it’s worth recapping what multilateralism is believed to have offered the world economy and how bilateralism differs from it and what we can expect.

In essence, multilateralism is believed to have:

  • Encouraged a spirit of global co-operation.
  • Created international standards, as well as harnessing the efficiency advantages of a broader market.
  • Put in place common standards that enabled companies to exploit the advantages of a global scale.
  • Resulted in simplified origin rules, making it easier for businesses to establish seamless supply chains.
  • Ensured tariff cuts offered to one country were offered to all and to every country’s benefit.

In contrast, the bilateralism is seen to:

  • Pit country against country commercially and politically.
  • Reduce the global interdependence of countries that facilitated an unprecedented period of relative peace after the world war.
  • Add complexity to the world’s trading system and resulting in, as trade economist Jadish Bhagwati, warned years ago, “a spaghetti bowl of preferential deals”.
  • Introduce discrimination against countries not party to trade agreements.
  • Lower tariff barriers between parties to the trade deals but not everyone else.
  • Distort the efficiency of the trading system.
  • Encourage so-called “hub” and “spoke” trade relationships, with the hub country bearing more influence and attaining a greater advantage than the spoke country. This is where emerging markets, and South Africa, could well find themselves as the spokes, with China, for instance, the hub, dictating the terms of the trade agreement.

These are two different worlds, the consequences of which go far beyond the trade environment and spanning global geopolitics, the macroeconomy, and industry fortunes.

Many have tried to quantify the impact of failed US-China trade negotiations, Trump’s threatened tariff increases and the accelerating shift to bilateral trade relations. Until the new reality dawns, it will be difficult, well-nigh impossible to gauge the full extent other than to say growth will undoubtedly be affected, inflation may well increase and the commercial landscape will be transformed.

Says Izak Odendaal, Old Mutual Multi-Managers investment strategist: “In the end, everybody loses if there is an escalation of the trade war. While the direct impact of the trade intervention is already difficult to measure, the indirect impact – increased uncertainty that leads to delayed purchasing and investment decisions – is even harder to estimate. Most economists believe the latter impact is likely bigger than the former. But after a period of adjustment, life goes on. Companies will reorganise their supply chains and consumer spending patterns will adapt.”

One of the most visible impacts of Trump’s recent actions – if followed through – will be on inflation. Trump’s decision to clamp down on Chinese tech company Huawei could well be the first step in turning the tide on the disinflationary impact technological developments have had on prices globally.

The digital economy’s proportion of the global economy has expanded markedly. UNCTAD estimates the total value of global e-commerce transactions, both domestic and cross-border, at $25-trillion in 2015; a 56% increase on 2013’s number.

In its 2018 publication, The future of world trade: How digital technologies are transforming global commerce, the World Trade Organisation (WTO) found that one of the most significant impacts of digital technologies was the extent to which they would reduce trade costs. The WTO noted that “digital technologies allow for easier entry into markets and increased product diversity, making it easier for them to produce, promote and distribute their products at a lower cost”.

However, Trump’s decision last week to put Huawei on the “Entity List” on global trade bodes ill for “easier entry” for non-US technology companies. The designation prevents the Chinese telecommunications giant from buying parts or technology from US suppliers without government approval, a game changer for global technological and digital integration.

But just as China’s ZTE found itself on the list last year and then was given an 11th-hour reprieve by Trump, the rules of the new trade game are impossible to predict and the end-game is anyone’s guess. The only real certainty we have now is that America, and not global, multilateral considerations, really does come first for Trump. DM


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