Trade winds will continue to roil markets

One of the few worries that investors had before the Covid-19 pandemic was the deterioration in the mood over world trade. Now, it’s moving back up the agenda.

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  1. Charles Stanley

Part of this was the more-aggressive approach of President Trump, who escalated a trade dispute with China. He withdrew the US from the Trans-Pacific Partnership which had been agreed by his predecessor – and demanded a renegotiation of Nafta, which he saw through.

The situation was exacerbated by the revival of old disputes, with decisions on the Airbus/Boeing feud leading to tariff retaliations, whilst the US/China arguments expanded into security, intellectual property and human rights. There was also a trade spat between India and China as they fought out their border disputes on the ground. 

The huge economic impact of the anti-pandemic measures put these concerns into perspective – and largely side-lined them last year. The World Trade Organisation's (WTO’s) autumn forecasts in 2020 anticipated a 9.2% decline in world trade for 2020, to be followed by a partial recovery – with a possible gain of 7.2% this year. It has warned of a lower figure if the pandemic outbreaks go on too long in 2021. The decline in Asia was lower than elsewhere. As a result, the recovery is expected to recoup the losses more quickly.

The WTO drew attention to the lower growth of world trade from 2011-2018 after the banking crash at the end of the previous decade. It now thinks there will be a slower growth rate again, with the world not returning to previous trend growth any time soon.

Trump’s trade war in vain?

The organisation’s commentary – and trend lines imply there was little damage to trend growth from the President Trump interventions – borne out by the persistence of the US trade deficit during his period in office.

What damage was done was offset by trade improvements elsewhere, leading up to the completion of the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership, which came into effect in late 2018 without US membership. There was a decisive and unprecedented peacetime collapse in world trade in 2020 from the anti-pandemic policies pursued in most of the world.

This year, the policies followed to promote recovery will themselves come to be part of a series of debates and disputes over new restrictions on free trade. Free trade needs to be squared with tackling the changed priorities and concerns of states.

The pandemic has led to wide ranging suspensions of state aid regimes. International rules have previously been used to limit the amount of subsidy that can be paid to favoured sectors and companies; to prevent unfair tax changes; limit home purchasing by the public sector without open tenders; and to ensure realistic standards and definitions of origin are used in conducting trade.

More of these anti-competitive conducts have emerged as responses to the extraordinary demands of fighting the virus. States have intervened with cash and controls on a large scale. The interruptions to international travel have been especially damaging to the promotion of overseas trade. The international trade system has however responded to changing needs, with huge growth in traded personal protective equipment and clothing, and some increase in computers and mobile phones, needed to spread the use of digital alternatives to life's activities. Food trade has been less damaged than manufactures or services by the anti-virus measures.

The US adjusts its position

President-elect Biden has promised to be more sympathetic to the WTO and the international rules, though he may continue to take a tough line over China for a variety of wider strategic and political reasons.

The UK has now agreed a tariff-free deal with the EU and has at the same time cut its tariffs somewhat with the rest of the world now it can choose its own tariff schedule. It has rolled over many of the free-trade agreements the EU had with various countries including Japan. It is now seeking membership of the Trans-Pacific Partnership.

TTP deal in prospect

This grouping of eleven countries accounting for 13.4% of world GDP is willing to negotiate a deal where most tariffs are removed. The TPP may also welcome the US back to the grouping. This too would require a new negotiation as several of the US’s requirements for the deal were dropped from the Agreement when President Trump refused to sign. These are welcome moves to promote freer trade. 

Getting the subsidy and other state-aids issues under control may be more difficult post Covid-19. Many countries and regions are now keener than before to have more access to products made close to home – and more nervous of relying on far flung supply chains.

The bitter disputes over Airbus, which resulted in major tariff impositions, may be repeated in the years ahead as the international system counts the cost of the great cradle of subsidies, nationalisations and government procurement which has changed many western systems during the disease.

More of every western economy today depends on state subsidy and cheap loans, and more on public purchasing. All the time the northern winter allows the virus to spread widely governments will need to play a much bigger role to offset the damaging effects of lock downs and bans on whole sectors of activity. 

The WTO is right to be cautious about future growth rates in trade. There will be both a retreat from globalisation and advocacy of policies based on more special terms, subsidies and national purchasing. International companies will need to be more attentive to national and local concerns as they adjust to a world where others do not share their enthusiasm for complex supply chains and reliance on long distance transport. This, in turn, will have an impact on valuations of individual companies and sectors that depend on trade for a major part of their activities.

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