Trade War Volatility: Is That the New Norm?

Since March 2018, trade war has become a feature in global markets. Markets have panicked by the measures imposed and then recovered and moved on to higher levels. In the last 18 months, this cycle has been repeated over a dozen times.

The Dow Jones touched an all-time high of 27,398 on July 24, 2019. It was up 25% as compared to 2018 and 13% year to date.

The U.S. economy grew 2.9% in 2018 while China grew 6.6% for the same year. This was remarkable against a backdrop of 12 tariffs imposed (and retaliations) since March 2018. And by September, the U.S. intends to impose a 10% tariff on USD 300 billion goods from China. This is beyond the 25% imposed on USD 250 billion goods imported from China. China’s retaliation is on farm products from U.S. and depreciating the Yuan by 1.4%.

Table: Major US tariff actions and retaliatory moves

(implemented and threatened)

Category	Cumulative amount of goods targeted (billions)	Cumulative max. tariff payment (billions)	Max. tariff payments as % of world GDP
Canadian Softwood Lumber	$6	$1.2	0.0%
Solar panels & washing machines	$11	$3.0	0.0%
Steel & Aluminium with CN/MX/EU exemptions	$31	$6.5	0.0%
Retaliatory: Mexico	$33	$7.1	0.0%
EU Steel & Aluminium	$37	$7.8	0.0%
Retaliatory: Turkey (4-140% on selected goods)	$38	$8.0	0.0%
Retaliatory: EU	$42	$8.8	0.0%
Retaliatory: Canada (10-25% tariffs on $12.6 billion)	$54	$11.1	0.0%
China ($250 billion implemented; $300 billion threatened)	$604	$148.6	0.2%
Retaliatory: China	$768	$174.1	0.2%
Retaliatory: India (10-50% on selected goods)	$770	$174.3	0.2%
Autos ex. Canada & most of Mexico (threatened)	$1,012	$234.9	0.3%

Source: The Star

The cumulative effect of tariff payments is less than 0.3% of world GDP. But, it is quite likely that the trade war will continue beyond 2020. China may want to wait till after the U.S. Presidential election to enter into any trade agreement with the U.S.

Meanwhile, U.S. farmers suffer with China officially cancelling all purchases of U.S. agricultural products. “Trump is ruining our markets” said one farmer from North Dakota. According to USDA, farm income has dropped 45% from USD 123.4 billion in 2013 to USD 63 billion in 2018. Government subsidies only cover about USD 15 per acre when the loss is USD 70 per acre. Federal aid package totalled USD 16 billion in May 2019. It’s too late for some farmers. And the American taxpayer is subsidising the American farm sector. What was wrong with the U.S. strategy? Everything! Instead of a coalition of EU, Canada and U.S. imposing tariffs on China it has become a “free for all” with the U.S. left alone and vulnerable. There are reasons to re-negotiate trade arrangements with China especially on technology transfers and other IP-related matters but “a bull in a China shop” (no pun intended) strategy is doomed to fail.

What about Malaysia and Asean?

Mala Raghavan from University of Tasmania examined the impact of the trade war on Asean and selected NIE economies. On trade intensity (imports plus exports as a percentage of GDP), the Asean and Group 4 showed the following results:

Malaysia will be heavily influenced by developments in global activities and is vulnerable to external trade or economic shocks. In the short term, there could be some gain with industries relocating from China to Vietnam, Malaysia and Indonesia. In the longer-term, we need to diversify our markets further or remain vulnerable to the antics of two elephants!

As Mala concludes, US-China trade war is the ‘biggest threat’ to Asian economies as growth forecasts are slashed (ADB 2019). If China and U.S. growth slows then:

-        global manufacturing will suffer;

-        world trade volume will decline;

-        trade volatility will increase, creating uncertainties,

-        investment growth in ASEAN/Asia will drop; and

-        heightened volatility in global financial markets may become the new norm.

Reference:

1. Tee Lin Say, Trade war volatility to become the norm, The Star, 10 Aug 2019

2. Emma Newburger, ‘Trump is ruining our markets’: Struggling farmers are losing a huge customer to the trade war — China, CNBC, 10 Aug 2019

3. Mala Raghavan, The Dragon Amongst Tiger:  China and Cross Border Trade Shocks in Asia, Tasmanian School of Business and Economics, 9 Aug 2019