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Sheep graze between rows of grapes at a vineyard in Mareuil-sur-Ay, eastern France, during the traditional Champagne wine harvest in October 2013. The Trump administration has threatened to slap 100 per cent tariffs on champagne, cheese and French luxury handbags in retaliation for France’s digital services tax. Photo: Reuters
Opinion
David Brown
David Brown

Donald Trump’s trade wars could scupper the euro-zone’s fragile economic recovery. That’s the last thing both sides need

  • Supportive ECB policies and green-shoot growth in several European economies, as Germany successfully avoided a recession, are good news for the market. But the US threat of tariffs on French goods could portend an escalation of tensions
David Brown
David Brown
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There has been much focus on the pitfalls of the US-China trade war, yet the threat of increasing trade tensions between the US and Europe could be a bigger potential worry for global markets.

Forget US President Donald Trump’s headline-grabbing threat to slap 100 per cent tariffs on champagne, cheese and French luxury handbags in retaliation for France’s digital services tax, which is expected to affect US tech giants such as Google, Apple, Facebook and Amazon.

If the US and Europe go head to head and global growth takes another hit, there could be serious consequences for China. It’s the last thing global investors need right now. They need hope and encouragement looking ahead to 2020, not more dismay. 

The 17-month trade dispute is clearly taking its toll. China is feeling the pinch, judging by the latest trade data, showing exports down 1.1 per cent in November, for a fourth consecutive monthly decline. The positive takeaway is that more domestic stimulus steps will now be needed so Beijing can help steer the growth rate into a more secure range above 6 per cent next year.

For this to happen, China needs forward-looking, targeted and effective policies to keep global risks at bay and ensure domestic demand stays underpinned. It will require even looser monetary and fiscal policies, which will keep investors positive for the time being.

As Germany is the world’s third-largest exporter of goods and services, which means its fortunes are closely governed by the ebbs and flows of global trade, it’s no surprise that the nation’s leading economic indicators have been so fragile.

Germany was lucky to avoid a recession by the skin of its teeth in the third quarter and many believe the economy is still not out of the woods. Exports have suffered, domestic demand is weak and GDP growth might be lucky to reach the 0.4 per cent forecast by the European Commission in its autumn outlook.

Don’t hold your breath for a stimulus bonanza from China

Yet, while doom and gloom persists, some German business surveys are showing signs of recovery. So what’s driving expectations?

Source: New View Economics
Clearly the promise of continued monetary easing from the European Central Bank is beginning to help. It’s certainly acting as a prop for European equity markets. Credit is cheap, money is flush and the weak euro should be giving hard-pressed European exporters a keener edge.

But there are signs, too, of stronger activity emerging in some of the smaller European economies as the impact of super-easy money and better employment conditions emerge. The economies of Ireland, Greece and Portugal, all badly damaged by the European debt crisis, appear to be over the worst and back on the mend.

This means opportunities for stronger internal trade within the single market bloc are looking much better, which is good news for German exporters.

Containers are piled up at a Hamburg port in 2012. The recovery of smaller European economies is good news for German exporters hoping to see more robust trade within Europe. Photo: Reuters
The White House can’t be happy with US economic growth currently stuck around 2 per cent. Nor will Germany be content with its economy sailing so close to a recession, especially with key federal elections looming in 2021. On both sides, the focus has to be on stronger growth, higher employment and a settled political outlook, or suffer the consequences. Pressure to compromise is getting stronger.
It’s easy to conclude that the US and Europe will eventually mend fences. Neither side can afford a damaging escalation of the trade row. The US impeachment crisis, fallout from the US-China trade war and Trump’s low popularity ratings all overshadow his chances of re-election success next year.

Trump needs to rebuild his political prestige, not kill it off for good. A deepening trade row with Europe would be the final nail in the coffin. On the other hand, if Trump plays his cards right, a detente in trade relations with China and Europe could be Trump’s winning hand. Timing will be the key.

Equity markets should take heart. The bottom is not about to drop out of global trade and investors should be looking forward to stronger cyclical recovery next year.

David Brown is the chief executive of New View Economics

This article appeared in the South China Morning Post print edition as: Trade war a threat to Europe, but all is not gloom and doom
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