A reversal in U.S. trade policy could make 2017 the year that efforts to build multinational trade zones crumble, returning the focus to tough, bilateral dealmaking.
In October 2015, officials from 12 nations including the U.S. and Japan gathered in the American city of Atlanta to ink the historic Trans-Pacific Partnership, confident of the dawning of a new age of trade governed by such high-level, multilateral agreements. Yet that dream lies all but dead just over a year later, not least due to Donald Trump’s presidential victory and his pledge to pull the U.S. from the agreement upon taking office Jan. 20.
Many bilateral free trade agreements, which reduce or abolish tariffs and set rules for trade in goods and services between two nations, have been struck over the years. Multilateral agreements extend this notion to the regional level and improve security in the areas they cover, further greasing the wheels of commerce.
Yet Trump prefers his trade pacts one on one — the better to drive hard bargains, leveraging U.S. economic and diplomatic might to secure the most advantageous terms. Multilateral pacts involve far more careful compromise and require each nation to give and take small concessions rather than pushing for an unambiguous win.
As the FT first reported yesetrday, in a dramatic development for Sino-US relations, Trump picked Peter Navarro, a Harvard-trained economist and one-time daytrader, to head the National Trade Council, an organization within the White House to oversee industrial policy and promote manufacturing. Navarro, a hardcore China hawk, is the author of books such as “Death by China” and “Crouching Tiger: What China’s Militarism Means for the World” has for years warned that the US is engaged in an economic war with China and should adopt a more aggressive stance, a message that the president-elect sold to voters across the US during his campaign.
In the aftermath of Navarro’s appointment, many were curious to see what China’s reaction would be, and according to the FT, Beijin’s response has been nothing short of “shocked.” To wit:
The appointment of Peter Navarro, a campaign adviser, to a formal White House post shocked Chinese officials and scholars who had hoped that Mr Trump would tone down his anti-Beijing rhetoric after assuming office.
“Chinese officials had hoped that, as a businessman, Trump would be open to negotiating deals,” said Zhu Ning, a finance professor at Tsinghua University in Beijing. “But they have been surprised by his decision to appoint such a hawk to a key post.”
On Monday China followed through a warning to “take further measures” against WTO members which continue to impose tariffs on its goods 15 years after Beijing’s accession to the organization.
On Monday the Commerce Ministry said that China has launched a dispute resolution case at the WTO, demanding that all WTO members, particularly the US and EU, stop using the “surrogate country approach” to impose higher tariffs against Chinese goods, which they claim to be exported at artificially low prices. “Regretfully, the US and EU have yet to fulfil this obligation,” the ministry wrote on its website. Sunday December 11 marked the 15th anniversary of China’s WTO accession, and China expects governments which have not already done so, to lift anti-dumping tariffs against its exports and treat Beijing like a fully-fledged member of the organization. The WTO and China agreed an accession protocol when Beijing joined the organization in 2001. Article 15 of this protocol dictates the terms which importing WTO members can use to compare their prices with those of Chinese producers, to determine if that producer is competing fairly with the domestic producers in the importing country. Some WTO members including the US and EU want to reserve the right to restrict Chinese imports with higher tariffs, in order to protect their manufacturers against “dumping,” the process by which a manufacturer exports a product to another country at a price below that charged in its home market, or at a price lower than the cost of production.
In order to investigate whether China is dumping goods, for the first 15 years of WTO membership Beijing was subject to the “surrogate country approach,” as laid out in Article 15.
One week after JPM made the exact same forecast, warning that the recent surge in the USDJPY will fade dramatically as Dollar euphoria shifts to concerns about protectionism, overnight UBS Group’s $2 trillion wealth-management arm said yen traders have got the Donald Trump “trade” all wrong, and the yen will strengthen to 98 per dollar by this time next year.
Cited by Bloomberg, the firm’s Tokyo-based head of Japanese equity research Toru Ibayashi echoed warnings first voiced on this website two weeks ago, and says expectations for fiscal expansion have become overblown, and protectionist policies will come first in the new U.S. administration.
“The market has latched on to only the juicy bits of Trump’s policies, and wrapped them up with unreasonable euphoria, which we think is pretty much a misinterpretation,” Ibayashi said in a phone interview Monday. “A market that’s been overbought on hope will quickly fall apart.”
There were two developments before the weekend that will likely spur a response in the week ahead.
First, while most were looking out for DBRS credit review of Portugal, Fitch surprised by cutting Italy’s credit outlook to negative from stable. At the heart of the decision was concern about the repeated delays and back loading of fiscal consolidation. The disappointing growth, the non-performing loan burden, and the political climate pose downside risks.
Italian bonds which had been underperforming Spain bonds had begun holding their own. Last week, the benchmark 10-year bond yield fell 2.5% in Italy but rose slightly in Spain. The divergence was sufficient to change the month-over-month back into Italy’s favor (+18.5 bp vs. Spain’s +19.7 bp). Fitch noted that even if Renzi does not resign if the referendum fails, the government may be weaker, and parliamentary elections are scheduled for May 2018, and Euro-skeptic political forces are on the rise (5-Star Movement won Rome and Turin in elections earlier this year).
The surprise action by Fitch, coupled with EU demands that Renzi alters the draft budget may weigh on Italian bonds. Italian bank shares rallied for three consecutive weeks, including a sharp 7.3% advance last week. They may also be vulnerable if yields continue to rise. Recall that DBRS put Italy on credit review with negative implications in August. DBRS is the only one of the top four rating agencies that put Italy in the “A” band. A cut would increase the haircut the ECB imposes on Italian bonds used as collateral for loans. The underperformance of Italian bonds relative to Spanish bond may resume if Spain is able to avoid a new election before the end of the year.
Over the past several years, whenever we have looked at the IMF’s global growth forecasts, the only chart we said is worth keeping an eye on, is that of global trade, because while GDP can be massaged, retroactively revised, and “double-seasonally adjusted” when the need arises – and is far more a political “metric” than an economic one – trade remains the most objective indicator of how the world is truly doing at any given moment, especially since “central banks can’t print trade.”
In fact, it has been our contention for several years now that the single best indicator of the global economy is the rate of growth in global trade, which unfortunately has been slowing for the past 5 years.
Making matters worse, according to a new update from the World Trade Organization, global trade is now set to grow at the slowest pace since the financial crisis. In a report issued today, the WTO said that world trade will again grow more slowly than expected in 2016, expanding by just 1.7%, well below the April forecast of 2.8%.
The forecast for 2017 was also slashed, with trade now expected to grow between 1.8% and 3.1%, down from 3.6% previously. With expected global GDP growth of 2.2% in 2016, this year would mark the slowest pace of trade and output growth since the financial crisis of 2009.
France wants to halt thorny EU-US trade talks on the Transatlantic Trade and Investment Partnership (TTIP) as President Francois Hollande underlined there would be no deal until after President Barack Obama leaves office in January. Matthias Fekl, the French minister for foreign trade, has said his country will call for an end to the deal. France has been sceptical about the TTIP from the start and has threatened to block the deal, arguing the US has offered little in return for concessions made by Europe. All 28 EU member states and the European parliament will have to ratify the TTIP before it comes into force.
The statements came just a couple of days after German economy minister Sigmar Gabriel had said talks for TTIP had de facto failed. Gabriel, who leads Germany’s centre-left Social Democratic party and is vice-chancellor in the coalition government, said Europe mustn’t submit to the American proposals. Mr. Gabriel’s statement is in contrast with the position of Chancellor Angela Merkel who supports the deal. Meanwhile, the US-German conflicts are growing. US courts and authorities took a hard line against the Volkswagen Group, Germany’s largest car manufacturer, in relation to its exhaust scandal. In a deal that does not include all damage claims, VW is required to pay up to 13.6 billion euros. There is a growing chorus in Germany saying that the country should orientate more to Asia. This perspective shared by the organizers of the anti-TTIP lobby, including the German Trade Union Federation (DGB), the Left Party and the Greens.
Asia will find itself in a precarious position if Donald Trump wins the U.S. presidency, analysts at Japanese brokerage Nomura have warned.
“A Trump presidency would no doubt hurt Asia’s GDP growth and could ultimately drive cost-push inflation, impart smaller trade surpluses and looser macroeconomic policies,” lead author Rob Subbaraman says in a report titled “Trumping Asia.” “The knee-jerk reaction to a Trump victory by Asia’s financial markets would almost surely be to sell off as investors’ price in a greater risk premium to U.S. policy uncertainty, protectionism and regional insecurity.”
Subbaraman notes that not all Asian economies would be affected equally, should the Republican nominee pull off a victory this November. While South Korea and the Philippines “would be among Asia’s most vulnerable in terms of both economic and geopolitical channels,” India and Thailand “seem among the least exposed,” and the impact on China would be “limited.”
For South Korea, trade is the primary concern. The country’s exports to the U.S. were equivalent to 5% of its gross domestic product in 2015, and its merchandise trade surplus with the U.S. averaged $21.6 billion annually from 2012 to 2015. Trump has criticized the free trade agreement between the two countries for stealing American jobs.
“While a renegotiation may not be feasible any time soon … there is a risk that Mr. Trump could declare South Korea, in addition to China, a currency manipulator,” the report says.
If South Korea was to pay for the U.S. military presence on its soil — as Trump has suggested — the added fiscal burden would hinder the economy, while “the withdrawal of U.S. forces would dramatically increase geopolitical risks.”
Japan looks to join the U.S. and European Union in imposing anti-dumping tariffs on Chinese steel exports, though findings that domestic steelmakers have not been substantially harmed could make such measures difficult to justify.
Leaders at the Group of Seven summit on Friday said they were prepared “to consider the broad range of trade policy instruments and actions” required to bring excessive global steel production capacity under control. This “could conceivably include such policies as anti-dumping and countervailing tariffs,” a top official at Japan’s trade ministry said. Japan will keep a close watch on imports of a variety of materials, including steel, the source indicated.
An anti-dumping duty would apply to goods being exported to Japan for less than their market prices at home. In raising these products to a more appropriate price, the policy would combat low-cost imports’ negative impact on Japanese companies. A countervailing tariff would be similarly applied to goods produced with the help of foreign government subsidies.
Both measures are permitted by the World Trade Organization in cases where real damage is being done. But Japan has no experience applying them to steel products.
The government this month began letting industry organizations, including those in the steel sector, request anti-dumping measures more easily. These requests will result in action if an investigation shows that low-cost imports are harming Japanese businesses by distorting the market.
G-7 leaders agreed a closing statement after meeting in the Japanese region of Ise-Shima on Thursday and Friday. Following are key points from the text:
World Economy: Global growth is our urgent priority. Taking into account country-specific circumstances, we commit to strengthening our economic policy responses in a cooperative manner and to employing a more forceful and balanced policy mix, in order to swiftly achieve a strong, sustainable and balanced growth pattern.
We reiterate our commitments to using all policy tools – monetary, fiscal and structural – individually and collectively, to strengthen global demand and address supply constraints, while continuing our efforts to put debt on a sustainable path. We reaffirm the important role of mutually-reinforcing fiscal, monetary and structural policies, the three-pronged approach, to buttress our efforts to achieve strong, sustainable, and balanced growth.
Migration and Refugees: The G7 recognizes the ongoing large-scale movements of migrants and refugees as a global challenge which requires a global response. We commit to increase global assistance to meet immediate and long-term needs of refugees and other displaced persons as well as their host communities. The G7 encourages international financial institutions and bilateral donors to bolster their financial and technical assistance.