Trade winds veer dangerously

As Covid-19 takes over the headlines Donald Trump’s trade battle with China rages on. This week, it appeared to take a turn for the worse.

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  1. Charles Stanley

In January this year, the news that China and the US had reached agreement on a two-year deal to boost trade, with special emphasis on China buying more US goods and food, helped the markets rise to new highs. The most negative feature of Donald Trump's policies from the point of view of what would promote growth was his trade war. This was eased by an end to the upward moves on tariffs against China and signs of the wish for trade to make its contribution to rising prosperity.

At the time of the Agreement we drew attention to how easy it would be for either side to break it. It was unlike a normal international treaty as it lacked external, independent dispute-resolution procedures designed to avoid walk out if one of the parties felt aggrieved. Like other commentators, we also thought the targets for increased Chinese imports were too demanding to be achieved in full.

Yesterday the US President gave his latest thinking on the Agreement. He said: "The ink was barely dry [on it] and the plague came over. “And it doesn't feel the same to me". Speculating on what he could do about it, he reminded us "We could cut off the whole relationship," which he sees as bringing a saving to the US of $500bn of imports they would no longer buy. He did not go on to explain whether and how those goods might be replaced in US supply chains, nor what bad impact this might have on world trade and the wider world economy.

Maybe this is just a bit of language to remind his voting base that he sees China as a threat which needs taming, as many of his voters do. Maybe it is a bit of sabre rattling in the hope that China will step up her efforts to buy US goods under the current Agreement. It is not possible to ignore it entirely, given the current state of world trade and the impact the virus has had on trade relations and volumes around the world.

Trade will slump

The World Trade Organisation has given us a wide range in its forecast of a fall in world trade this quarter of between 12% and 32%. Maersk, the large container shipping business, has suggested a 20-25% fall, and the UN's UNCTAD has a 27% decline. We can take it that the fall will be large. International trade which can offer a useful boost to world economies when it is growing, has become an impediment to recovery. The trade winds have veered from tailwind to headwind.

The Covid-19 world is one where many governments and companies are rethinking their approach to buying the goods and services they need. Prior to the virus attacks, Mr Trump had started to change western thinking about security, technology and defence. He drew on work from the Pentagon and Intelligence sources to warn that China's involvement in digital networks, smartphones and computers could compromise sensitive data and leave the west vulnerable to cyberattack. He wants the NATO allies to ensure crucial civilian as well as military digital technologies are under home control, with all parts made and supplied by western companies and factories.

Now other western governments as well as the US are looking at shortening supply lines for everything from food to protective clothing and from drugs to critical machinery. There will be a new emphasis on resilience, on more home production, control of patents and specifications to make more when needed, and better stocks.

A clash of civilisations

It is clear that there is an internet battle ahead between a Chinese led system and a US led one, and about current Chinese plans to buy up any distressed western companies that offer Cloud access or crucial mobile technology. The disputes look as if they will broaden to other features of US/China trade as a President seeking re-election has to find new themes, now his central proposition of more jobs and higher living standards has crashed thanks to the advent of what he calls the Chinese plague. This is another negative for the world economy and for markets.

It also reinforces our central message. In this damaged economic outlook, some companies and sectors will do well. This now includes those that substitute western output for Chinese output, and all those who can build domestic resilience into supply. Cyberattacks are a genuine menace. Protecting against them is today more than a matter of adding some additional software to western computers. It is a matter of who develops and exploits the underlying technology, and who makes the products needed to deliver internet and computer services.

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