Why we may escape a US-China trade war, but not turmoil in global trade

Neal Kimberley says on top of the economic uncertainty, rising oil prices, rising interest rates and a slowdown in Europe and Japan are creating conditions for a perfect storm. Economies should brace themselves for ill winds

PUBLISHED : Tuesday, 22 May, 2018, 11:36am
UPDATED : Tuesday, 22 May, 2018, 10:50pm

International commerce could be sailing into troubled waters, driven by adverse trade winds that appear to have been the result of global trade tensions. But the explanation for such adverse trade winds might not be quite that simple. There’s more than one headwind blowing.

On May 17, data from the World Trade Organisation showed that while global merchandise trade had expanded at above-trend pace in the first quarter of 2018, the outlook suggested slower growth. But, as it said, “risks to the trade forecast posed by rising trade tensions remain present”.

The WTO’s latest World Trade Outlook Indicator revealed a current value of 101.8, which, while above the index’s baseline value of 100, was below the previous value of 102.3. The recent dip in the indicator reflects a decline in two component indices – export orders and air freight, “which may be linked to rising economic uncertainty due to increased trade tensions”, the WTO said.

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Earlier this month, while announcing that total exports of goods grew strongly by 5.2 per cent year on year in real terms in the first quarter, the Hong Kong government also noted how “external uncertainties have increased of late”, flagging for concern the “trade tensions between the US and its trading partners, notably the mainland”.

Elsewhere, deterioration in international trade flows is already discernible.

In Japan, whose economy shrank by 0.6 per cent on an annualised basis in the first quarter of 2018, external demand, which represents exports minus imports, did add 0.1 percentage point to Japan’s first-quarter gross domestic product, but even that was because while the growth of exports from Japan decelerated, imports experienced greater deceleration.

Japan only registered export growth of 0.6 per cent in the first three months of the year, compared to an expansion of 2.2 per cent in the fourth quarter of 2017.

Meanwhile, data for March, released last Friday by the European Union’s statistics agency Eurostat, showed that exports of goods from the euro zone had fallen by 2.9 per cent compared to the previous year, while imports were down 2.5 per cent.

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It would be quite easy just to attribute the data from the euro zone and Japan to nervousness over international trade barriers, given the Trump administration’s well-stated position that other countries haven’t been playing “fair” with the United States over trade, but that would be too simplistic. After all, Hong Kong’s exports did well in the first quarter.

Meanwhile at the southern Californian Port of Long Beach, as it reported strong figures for container through-flow in April, executive director Mario Cordero made the point that “at least some of our strong growth appears to be a result of trade tensions as anxious shippers rush to get their cargo to overseas markets”.

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Intuitively, that makes perfect sense. If trade tensions rise, it would be logical to ship goods now rather than wait. That might help explain Hong Kong’s robust export growth in the first quarter, but it wouldn’t fit with the recent exports/imports data from the euro zone and Japan.

Perhaps there are other factors at play, notably the rising price of oil. Both the euro zone and Japan are major importers of energy.

Oil’s up, dollar’s up, interest rates are up. Asia’s heading down?

Perhaps more pertinently, the Asia-Pacific area is a massive importer of energy, with China alone importing some 9.6 million barrels of oil a day in April, equivalent to 10 per cent of global consumption.

Rising energy costs must put upward pressure on production and transport costs. Indeed, Maersk, the world’s biggest container shipper, said last week that container freight rates had increased 7 per cent in the first quarter.

The rising price and a somewhat reduced availability of US dollars could also be creating an adverse trade wind.

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Undeniably, the greenback facilitates world trade flows, particularly in the all-important energy sector, yet the cost of securing US dollars has been rising in the face of US interest rate hikes, a sequenced programme of Federal Reserve quantitative tightening and greater competition from the US government to borrow dollars.

Combined with higher energy prices and nervousness about trade relations, that creates a powerful adverse trade wind.

Hopefully the announcement that China and the United States are, in the words of US Treasury Secretary Steven Mnuchin, “putting the trade war on hold” will soothe global concerns, but that’s only part of the picture.

Either way, other adverse trade winds will still blow a gale.

Neal Kimberley is a commentator on macroeconomics and financial markets