Trade war

Trade war

Since Donald Trump took office as American president, trade protectionism has once again become a hot topic. The withdrawal of the US from the Trans Pacific Partnership, tariffs on US steel and aluminium imports and the escalating trade war with China are all part of Trump's 'America First' policy. Negotiations with China are still ongoing, but it seems that an agreement is in the making. In the meantime, President Trump has also set his sights on the European Union. In the context of the protracted conflict between aircraft manufacturers Boeing (US) and Airbus (EU), he was already threatening to introduce new import tariffs on a range of European products. The EU then threatened to take countermeasures if these tariffs were to enter into force. Possible American import tariffs on cars and car parts are also like a sword of Damocles for the European economy. An escalation of the trade dispute with the US is therefore one of the largest economic risks for the EU.

Large bilateral trade deficits such as those with China and the EU are a thorn in the side of US President Trump

(US trade balance by trading partner, goods trade, in billions of USD)

Source: KBC Economics based on US Census Bureau

Recently implemented import tariffs in the trade war between US and China

(goods trade, in billions of USD)

Source: KBC Economics based on IMF DOTS

Publication in the picture

Box 2 in the April Economic Perspectives:

Box 2 - Global trade in a dip

Whereas 2017 brought a lot of positive surprises on the economic front, with stronger-than-expected GDP and trade growth, 2018 was defined by a slowdown in trade and activity. This weakness has been seeping through into the start of 2019 as well. The World Trade Monitor of the Dutch Bureau for Economic Policy Analysis (CPB) illustrates this very well (figure B2.1). The index measures international trade volumes of goods flows on a monthly basis. The figure clearly indicates the strong results in 2017, the struggles in 2018 and the collapse of trade growth at the end of the year. The first figures for January 2019 only show a partial recovery in goods trade.

Based on preliminary estimates by the World Trade Organisation (WTO), the global annual average growth rate of international trade volumes was 3.0% in 2018, well below the WTO’s initial estimates and significantly less than the 4.6% growth pace recorded in 2017. The very disappointing fourth quarter figures were the main cause of this notable underperformance in 2018. Weakness in trade growth was mostly concentrated in Europe and Asia, two regions with a very important share in total global trade flows. However, on the bright side, commercial services trade reported strong growth in 2018 (+7.7%), for the second year in a row, supported largely by robust services import growth in Asia.

Several factors were at the origin of the disappointing results for goods trade. The escalation of the trade war between the US and China was undoubtedly one of them. Multiple rounds of import tariff increases on both sides caused trade flows between the two countries to be distorted. Moreover, trade flows of other economies with close trade ties with the US or China were affected. The increased uncertainty led to a global negative impact. The persistent opacity surrounding the UK’s exit out of the EU also weighed on global trade flows. Weaker global demand and a decline in global GDP growth contributed as well to the deceleration in trade growth. In addition, temporary factors played a role. The problems in the German car manufacturing industry due to new emission test regulations and the US government shutdown likely led to transitory postponements in consumers’ and businesses’ purchase decisions.

Forward-looking indicators don’t suggest any marked improvement for international trade in the near term. Corporate sentiment, as measured by PMIs, is still on a downward trajectory in the manufacturing or tradeable goods sector. In particular the subcomponent of export orders remains weak overall. The World Trade Outlook Indicator of the WTO does not appear to be pointing towards a recovery of trade growth in the first half of 2019 (figure B2.2). Based on these findings, the WTO revised its forecasts for merchandise trade volume growth down to 2.6% in 2019 and 3% in 2020. A rebound of trade growth in 2020 is not unlikely, and this is consistent with our scenario of a partial recovery in global activity.

An important determinant for trade going forward will be the evolution of the trade tensions and surrounding uncertainty they cause. Trade negotiations between China and the US are still ongoing. A final deal has not been reached. Communications from people involved speak of progress, but a possible deal has been postponed until May at the earliest. One of the main stumbling blocks is whether or not the tariffs that were already implemented will be rolled back. Moreover, the US demand for enforcement mechanisms is a difficult topic for the Chinese authorities. Nonetheless, the US and China recently agreed on setting up enforcement offices that will monitor the compliance to the deal. Our base scenario doesn’t contain a further escalation of the US-China conflict as we think reaching some kind of an accord in the near future seems more likely. However, underlying issues will not be fully resolved. It is likely that the dispute will move away from trade issues to focus more on technology matters as China is focusing more on the production and export of products with high added value (also see KBC Economic Opinion of 11 April 2018)

Apart from the conflict with China, the US is building trade tensions with the EU. In the context of the long-standing conflict between aircraft manufacturers Airbus and Boeing, the US announced additional tariffs on imports of European products. The tariffs are a reaction by the US against the presumed illegal subsidies of the European governments to Airbus. The preliminary list includes products worth some USD 11 billion. This threat comes on top of the risk of additional US import tariffs on cars and car parts. For the already weakening European economy, these are notable factors of uncertainty that could potentially harm economic activity. Nevertheless, the EU decided to give a green light to new trade negotiations with the US. Although this is a hopeful signal, as long as trade tensions hold steady and uncertainty remains high, trade flows and investment decisions will be distorted globally.

Figure B2.1 – CPB World Trade Monitor (merchandise trade volumes)

Source: KBC Economics based on Dutch Bureau for Economic Policy Analysis (CPB) 

Figure B2.2 - WTO World Trade Outlook Indicator 

Source: KBC Economics based on World Trade Organisation

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