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Monday, August 27, 2018, 14:54
China pushes back against protectionism
By David Ho and Alex Ho in Hong Kong
Monday, August 27, 2018, 14:54 By David Ho and Alex Ho in Hong Kong

Nation works to strengthen multilateral links as US-initiated tariff row threatens global growth


By virtually all measures, global trade has surged in the almost two decades since China joined the World Trade Organization (WTO). 

The WTO expects global merchandise trade volume to grow by 4.4 percent this year, roughly in line with the 4.7 percent increase in 2017. But trade disputes could curb growth significantly and undo the progress from almost three decades of relentless trade liberalization.

“The strong trade growth that we are seeing today will be vital for continued growth and recovery,” said Roberto Azevedo, director-general of the WTO, in April. “However this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation. A cycle of retaliation is the last thing the world economy needs.”

A 2014 WTO report found that countries undertaking the reforms required to join the WTO, as China did in the years leading up to and after its 2001 entry, grow 2.5 percent faster for several years. 

The Organization for Economic Cooperation and Development estimates that a 50 percent drop in trade barriers could lead to a 20 percent increase in exports across G20 countries.

On the other hand, trade conflicts could hurt economic growth in the US, China and around the world. 

In July, the International Monetary Fund (IMF) kept its 2018 outlook for global growth unchanged at 3.9 percent but warned that if the trade barriers threatened by the US go ahead, the global economy’s output growth will fall by 0.5 percent by 2020.

The IMF cut forecasts for growth in various places across Europe, as well as Japan. The world economy could be hit to the tune of US$430 billion by 2020, according to the fund.

This could be the impact of the one-sided trade dispute started by the United States, which is now threatening to derail decades of progress toward freer growth, even as China doubles down on efforts to lower barriers and expand multilateral trade. 

“With the significant escalation of the tariffs from 10 to 25 percent, we can expect the dispute to be persistent and to have more of a material impact than we originally anticipated,” said Martin Petch, vice-president and senior credit officer of the sovereign risk group at Moody’s, the credit ratings agency. 

Petch is far from the only one warning of the negative effects of a trade war.

“The US-initiated trade war is already having a negative impact on the global economy,” said Francis Unwin, associate director at Atlantian Capital, a Hong Kong-based investment management and advisory firm. 

“The US import tariffs on Chinese goods have been met with an immediate, but we would argue measured, response from China. The imposition of the current tariffs will have a lasting impact on trade relations and may well stretch beyond both China and the US over time,” he said.

From left: Dan Wang, analyst at the Economist Intelligence Unit; Francis Unwin, associate director at Atlantian Capital; Martin Petch, vice-president and senior credit officer at Moody’s. (PHOTO PROVIDED TO CHINA DAILY)

Unwin noted that the “seemingly arbitrary imposition of tariffs by the US” has created instability across global markets. 

“It is this instability which, we believe, is the cause of greatest concern. Investors like stability. Volatility and instability may create localized opportunities, but these come with a higher risk profile than most investors are rightly prepared to accept,” he added.

In July, US President Donald Trump’s administration imposed duties on US$34 billion of Chinese goods. On Aug 23, Washington levied a 25-percent tariff on US$16 billion worth of Chinese products. Trump has threatened that the US might eventually target the entire US$500 billion in Chinese exports to the US. The US seems intent in not only attacking China but the idea of a multilateral regime in favor of bilateral deals. 

“Long-standing allies are also under pressure from the US and this may well force investors large and small to remain on the sidelines, until some rationality and stability returns to the marketplace,” said Unwin. 

“Volatility will result in a significant drop in global investment and push investors back into safe markets (typically their domestic market), where they feel more comfortable.”

Dan Wang, analyst at the Economist Intelligence Unit, said: “With rising tariffs, a trade war makes the pie of global trade smaller and disrupts the existing trade system. It brings new uncertainties to currencies in emerging markets, delays long-term investment in affected areas, and negatively affects local incomes.”

Wang said China will face a higher pressure of inflation from rising tariffs and difficult restructuring of its manufacturing industry. 

“Some parts or the whole of some supply chains will have to be moved out of China to countries unaffected by the trade war, such as Vietnam and Cambodia. Small export firms in coastal China will face hardships, as they are already operating with a thin margin,” she said.

Petch from Moody’s said the emerging economies that have benefited greatly from lower barriers to trade and the emergence of China as a global trade power remain vulnerable. He warned that ripple effects could introduce distortions to economic structures.

“Different economies have different vulnerabilities. Those deeply embedded in the global supply chain and reliant on tech transfers will likely feel the effects of a US-China trade war the most,” said Petch. 

“The effects can be hard to offset if it involves switching supplies across providers, as that takes significant time to happen. The countries best shielded are probably the ones with flexible exchange rates and financial policies,” he added.

To further mitigate the impact of the trade conflicts, Wang from the Economist Intelligence Unit believes the affected economies need to strengthen multilateral ties, even without the US. 

“China can explore options to establish free trade agreements with other large economies. Domestic markets need to further open up while the reform for the State-owned enterprises needs to push forward,” said Wang.

“The industrial supply chain is already globalized. To reverse that trend means to localize much of the production, which will drive up costs for factories and consumers. Globalization means more options for all,” she added.

The US move to impose tariffs on imports is likely to increase costs for the country’s consumers and exporters. 

Soren Skou, CEO of Danish shipping giant A.P. Moller-Maersk, cautioned that the US would get hit harder than other countries if a full-blown global trade war were to happen. Skou said the fallout of the current protectionist wave “could easily end up being bigger in the US”. 

“The first thing the American importers would do if tariffs are put on Chinese consumer goods would be to buy in Vietnam, in Indonesia or elsewhere in Asia,” Skou told Bloomberg. “Big US consumer brands like Nike produce in all of Asia, not just in one country, so there will be a substitution effect.” 

Petch said that globalization has made it difficult to offset things. “Multilateralism has proven to have global benefits and open borders have been beneficial to world economies,” he said. 

Multilateralism, open borders and globalization are fundamental to a modern investment environment. 

Atlantian Capital’s Unwin said “open borders enable investors to seek out true value, diversify beyond their domestic economy, bring much-needed investment into emerging markets and ultimately provide them with greater returns”. 

“In a world where many workers are heavily invested in pension and superannuation funds, creating stability, diversity and measured returns is important,” he said.

Unwin pointed out that a move away from globalization will drive investors “into the same domestic pool of opportunity which ultimately erodes available returns and value across the spectrum”.

Protectionism would only serve as a short-term and short-sighted plan. “Closing borders would only protect domestic industries and technologies for a short time, but missing out on the opportunity to share the future developments with others,” said Wang. 

“Education, knowledge and new ideas travel much faster globally than before, so less-developed countries can catch up fast,” she added.

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