Business Maverick

Business Maverick Op-Ed

Could the coronavirus break the back of global trade?

(Photo: Unsplash/Chuttersnap)

The coronavirus may be putting the global economic trajectory at risk but it is also likely to make it virtually impossible for the Chinese to meet the spending targets outlined in the US-China Phase 1 trade deal. But there is far more going on beneath the surface that threatens the not-as-free-as-before trade landscape, along with recent developments that severely undermine the ability of smaller economies, like SA, to object.

With most attention focused on the coronavirus infection barometer as it continues to head northwards, questions are beginning to emerge about whether China has any chance of meeting its Phase 1 trade deal commitment to purchase $200bn of US goods over the next two years.

 There is no doubt that the coronavirus has already had a heavy impact on global supply chains, which will inevitably detract from growth. But more of a worry is whether the virus could accelerate the already seismic shift in global trade dynamics that have been underway.

 Research done by Brookings Institute has found that the Phase 1 US-China trade deal is “a drop in the bucket”, compared to the less obvious trade distortions that have been introduced during the populist era. It says between 2017 and 2018 the total number of new policies that harmed foreign commercial interests had increased by two thirds and that last year a comparable level of trade distortions were introduced.

 By mid-November last year, it estimates that 40% of world goods trade was affected by trade distortions, such as tax breaks and “dubious” financial terms that governments offer their exporters. Tariff increases, along the lines of those seen introduced by the US and China since 2017, pale in comparison. Brookings finds that a mere 2% of world goods trade were affected by tariff increases that target a single trading partner in comparison.

 “Targeted trade policies of the type deployed by Beijing and Washington are a sideshow in comparison to the scale of commerce affected by market-distorting export incentives.”

 The reality, though, is that the US-China trade discussions may well turn out to be a sideshow but they are still going to be subject to intense scrutiny over the next few years at least. As such, any bad news on the progress the two global superpowers are making towards achieving a lasting resolution has the power to profoundly affect global sentiment. Setbacks to sentiment feed through to business confidence and, ultimately, the health of the global economy.

 The prognosis for the Phase 1 deal is not looking good. Even before the coronavirus appeared, there was mounting scepticism about whether China could fulfil its obligations as set out in the agreement. Now the epidemic is expected to put the targets even further out of reach.

 The Petersen Institute for International Economics took a close look at the increase in purchases the Chinese would need to make relative to the economic growth rates over the last few years. In an assessment of the findings, Chad Bown, a senior fellow at the Peterson Institute for International Economics, says, “the numbers are even more unrealistic than first believed.”

As shown in the graph below, China has committed to buying goods worth $210.9bn by 2020 and $257.5bn in 2021. This compares with purchases of $134.2bn in 2017. Sustaining 18% growth in annual exports over a four-year period would be a challenge, comments Bown, particularly with China’s economy growing much more slowly than in the past.

 “That matters, because with unrealistic export targets, the deal may be doomed from the start. Other beneficial aspects of Chinese commitments in the agreement could be put in peril. Even worse, hostilities might renew, leading to a reescalation of trade tensions currently on hold.”

 China may be given a reprieve, however, given that US President Donald Trump was arguably most interested in securing an agreement during an election year where he needs to appease constituents that have been adversely impacted by the tit-for-tat trade war. Also, if China does fail to make progress towards reaching its purchase target this year, it will only become evident in March 2021, after the US elections, when the trade figures for the period are published.

 More worrying, according to the PIIE analysis is that China’s commitment to make these purchases “reflects an alternative ‘managed trade’ approach to expanding US exports. What does that mean for the world? Bown says that instead of addressing the tariff and non-tariff barriers directly, the deal focuses on outcomes, requiring China to meet the specific spending targets. The problem with this approach is that it is likely to divert, rather than increase, trade flows. Countries that see export orders taken away from them because these have been diverted to the US instead or US companies with goods that are not on the designated list companies could be adversely affected.

 For decades, the emphasis has been on removing distortions that could interfere with the free flow of trade globally. However, recent US-China trade developments and less obvious but, it seems, equally damaging undercurrents have eroded all the ground gained since the end of the Second World War when avid support for trade liberalisation and globalisation first appeared.

The impact of the coronavirus on China and the global economy may not prove to be long lasting, but it could well accelerate the seismic shift in global trade dynamics already underway, at the expense of developing countries, including South Africa.

 Last week US President Donald Trump revoked the WTO subsidy preferences that had been extended to South Africa and other developing economies, including India and China. The subsidy preferences reduced the threshold that would trigger a US investigation in the event that nations were seen to be harming US industries by unfairly subsidising their exports.

 This is just one more decision that has undermined the trade negotiating power of emerging markets after the US put the WTO Appellate Body out of commission. Now smaller countries no longer have a say in WTO panel rulings.

 Whatever the outcome of the US-China phase 1 trade deal, it’s clear that the playing field is tilting in the US’s protectionist favour and, should Trump serve a second term, the end game is likely to be an increasingly fractured global trade environment. BM




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