Trade Global trade slows under shadow ofprotectionism

trade

NET EXPORT

GROWTH WILL BE

SLIGHTLY REDUCED IN

LATIN AMERICA AND

THE CARIBBEAN

FOR 2010-2021

GLOBAL TRADE SLOWS UNDER SHADOTW OF PROTECTIONISM

▶ FOR NOW, THE US QUITE FAR FROM A SUSTAINABLE TRADE SOLUTION WITH CHINA.

Atrade war between the United States and China could reduce global growth by one-GDP point by 2020 in the context of a world economy slowdown already taking place after a collapse in trade from almost 7% to 2.1% expected in 2019. This Gross Domestic Product is much lower than what was projected (3.2% this year and 3.4% in 2020). The United States government, instead of fueling trade tensions, should continue negotiations to try to reach a permanent trade agreement with China. Then, reestablish negotiations with the European Union, especially considering that the trade flow between the United States and the EU represents nearly 30% of world trade.

However, the rhetoric coming out of the Trump administration seems to be far from a sustainable trade solution in time with China or a short-term free trade agreement with the European Union, especially after the failed negotiations of the Transatlantic Trade and Investment Partnership, which stagnated after three years and is now considered obsolete. China’s trade surplus with the United States, an issue that deeply irritates Washington, rose from just over US $21 billion in April to US $26.89 billion in May, totaling US $110.547 billion in the first five months of 2019. Last year, the US trade deficit with China reached US $419 billion dollars, but these numbers shouldn’t unleash a tariff escalation that, in the long run, will end up harming the world economy of both advanced and emerging markets; and not just the countries that President Trump through his peculiar way of seeing global trade, is targeting.

“Trade is not a weapon, and trade wars often lead to a lose-lose situation. Winning them can simply not be done without harming both sides,” says Børge Brende, president of the World Economic Forum (WEF). And for decades trade has been the main way for countries around the world to develop peacefully, establish links and produce wealth; and it has been an enormously successful mechanism. What Donald Trump or his advisors fail to understand is that bilateral trade between countries does not have to be balanced, and that trade deficits are not bad per se and do not have to mean job losses or lower economic growth, such as The Global Future Council on International Trade and Investment of the World Economic Forum recently demonstrated.

President Trump has not merited, for example, that employment in the United States saw its greatest historical growth along with imports, according to statistics from the Federal Reserve Economic Data (FRED) of the Federal Reserve of St. Louis and that GDP growth was higher when the trade balance was more negative, according to statistics from the Organization for Economic Co-operation and Development (OECD). According to the Global Attitudes Survey conducted by the Pew Research Center last year, both in advanced and emerging market economies more than 80% of citizens value trade positively; however, and this would pay in favor of Trump’s protectionist policy, less than half believe that trade is beneficial for employment, wages or prices, skepticism that is especially pronounced in advanced economies.

An empirical analysis conducted by IMF technical staff based on a broad set of panel data on 35 countries and 13 industrial sectors, with country-specific macroeconomic variations and country and sector characteristics as controls, indicates that tariffs have economically considerable and significant repercussions at all levels of the value and real value added chains, employment and productivity.

Tariffs applied at any point in the value chain gene- rally have a much greater influence on the product and productivity than the national protection of a particular sector. Statistically, tariffs near and far from the origin have significant negative effects on value added sectors, according to the idea that either they increase the costs of the inputs (tariff near the origin), or they reduce the international demand for the product of that sector (tariff far from the origin). Likewise, both the productivity of the workforce and the total productivity of the factors experience a sig- nificant decrease due to the tariffs applied very near or far from the origin, because they either increase the prices of foreign inputs, or reduce the possibility of benefiting from returns at scale derived from tra- ding in international markets.

On the other hand, it seems that tariffs aimed to in- crease the protection of domestic producers have no significant effects, except for slight negative consequences on employment. According to the In- ternational Monetary Fund (IMF) analysis, there are compelling arguments to reduce tariffs. A tariff re- duction would not only boost trade, but also allow an adjustment of the international labor division to more fully reflect the comparative advantage which, in turn, generates benefits in terms of product, em- ployment and productivity in the countries reducing tariffs and in others located in different points of the value chain.

Let’s go back to the figures now. The government re- ported in June that the international trade deficit of goods and services of the United States fell 2.1% in April to $50.791 billion dollars. In the first four mon- ths of this year the negative trade balance reached US $205.4 billion, compared to US $201.327 billion in the same period of 2018. In April, US exports reached a value of US $206.8 billion dollars, 2.2% less than the previous month, and imports reached US $257.6 billion, a decrease of 2.2%.

Data from the Department of Commerce showed the trade deficit in goods with the European Union de- creased in April by US $1 billion and remained at $15.1 billion. The deficit with Canada fell by US $900 mi- llion and remained at $1.8 billion dollars, while the ne- gative trade balance with Mexico fell from US $9.505 billion in March to US $8.167 billion dollars in April. As for imported goods as a whole, they decreased US $5.4 billion to $208.7 billion dollars in April.

BARRIERS TO COMMERCE China and Russia were the countries that imposed the most trade barriers on exports from the Euro- pean Union in 2018 in a context of increased pro- tectionism where the EU detected up to 45 new barriers in countries such as Algeria, India, and the United States, among others. According to the 2019 edition of the European Commission report on trade and investment barriers published on June 17th, Chi- na is the country with the highest number of trade barriers considered problematic by Brussels, with up to 37 restrictive measures that curb exports and in- vestment opportunities for the European Union. With

34 barriers, Russia is the second on this list drawn up by the European Commission based on the alerts it receives from companies, which also includes India and Indonesia, both with 25 obstacles, and the United States, with 23.

While China and Russia impose obstacles to European exports, both powers, within their policy of full cooperation and complete understanding, are planning to increase bilateral trade to a new level to reach a volume that exceeds US $200 billion in the coming years; an objective that could be achieved after the recent signing in Moscow of a Chinese-Russian memorandum of understanding on trade promotion. In particular, Russia plans to increase soybean exports to China, the world’s largest importer of soybeans. Bidirectional trade between the two countries reached a record high of more than US $100 billion dollars in 2018.

THE WORLD’S LARGEST EXPORTER In China, the second largest economy in the world and the great engine of Asia, exports contracted unexpectedly in April although they grew again in May, despite the increase in US tariffs. On the other hand, in April Chinese imports had an unexpected first increase in five months, but fell in May at their fastest pace in almost three years, in

a clear sign of weak local demand that will force Beijing to launch new economic stimulus measures to stabilize markets and underpin stable growth, improve quality and change driving engines.

Recent trade data show a mixed picture of the Asian giant’s economy while investors remain alert to greater signs of economic stability in China since exports in April suffered a contraction of 2.7% and then increased 1.1% in May although some analysts expected shipments from the world’s largest exporter to fall 3.8 percent compared to the same period last year, according to the most recent customs data. Although China is not as dependent on its exports as in the past, they still constitute almost a fifth of its Gross Domestic Product. Between May and June, Chinese exporters decided to advance their shipments to the United States to avoid the risk of suffering new Trump tariffs. These constant shipments caused a considerable increase in export figures, which are only temporary and according to economists, should collapse in the third quarter of the year.

Although trade data from the country governed by Xi Jinping is positive in general terms, fears continue over a prolonged and costly tariff dispute for both the United States and China that could plunge the global economy into a strong recession. In fact, commercial friction between American President Donald Trump and senior Chinese government officials has become periodic, a situation that ignites concerns about an inevitable global growth chill.

China will promote new industries and business models to cope with US tariffs.

17 bizrepublic.com In order to face the constant tariff threats of the United States, China announced that it will optimize its export structure, encouraging exports of high-tech, high quality and greater added value products, while making its exports more competitive in quality, technological intensity, branding and marketing. The country will also promote new industries and business models in the commerce sector. It plans to inaugurate 35 pilot zones to enhance the development of cross-border e-commerce, as well deploy 14 test pilots for exports through the procurement market.

It should be noted that China’s trade with the European Union rose 11.7% year-on-year in the first five months of the year, while trade with the Association of Southeast Asian Nations (ASEAN) increased 9.4%. As cooperation between countries participating in the Belt and Road Initiative continues to strengthen, China’s trade with countries in the Belt and Road Initiative increased 9% year-on-year during the period, and growth was 4.9 percentage points higher than the general rate.

A very important fact that Mr. Trump never mentions in his poisonous tweets is that, at the international trade level, China is the main market for agricultural products from the United States, surpassing its closest neighbors, Canada and Mexico. In fact, soybeans accounted for more than half of the $9.2 billion that China bought from American farmers in 2018.

LEADERS IN OIL Saudi Arabia retained the title of the world’s largest crude oil exporter during 2018, according to the World Energy Statistics Outlook report from British company BP for 2019. According to the report, published on June 11th, oil exports from the kingdom increased 2.8%, reaching 7.38 million barrels per day (bbl) in 2018, compared to 7.18 million barrels per day in 2017.

Russia increased its crude oil exports only modestly, by 1.1% over the past year, reaching 5.54 million barrels per day in 2018, compared to 5.48 bbl the previous year, and it ranked second. Iraq ranked third, after the country increased its oil exports greatly, reaching 4.03 million bbl in 2018 compared to 3.76 million barrels per day in 2017. However, the lack of Foreign investments, political instability and lack of water could curb Iraqi oil production, according to the International Energy Agency (IEA).

CANADA AND LATIN AMERICA Meanwhile, trade in the Latin American and Caribbean region continues to expand despite the fact that in recent months exports have slowed in some of the major economies in line with the lower level of growth in world trade. In 2020 and 2021, according to World

Bank estimates, the growth of net exports will be slightly reduced in Latin America and the Caribbean, while external demand will be weakened and import demand will strengthen. A new escalation of trade restrictions between major economies could have an impact on exports and investment. A deeper deceleration than anticipated in China, the largest import destination for Brazil, Chile, Peru and Uruguay, could also represent a risk.

The Inter-American Development Bank (IDB) reported in June that the value of Latin American and Caribbean exports contracted at an estimated annual rate of 1.6% in the first quarter of 2019, the first fall after two years of uninterrupted expansion. The figure contrasts the increase in regional exports of 8.9% recorded on average in 2018. The report released by the IDB highlighted that the change in trend was marked by the slowdown as last year progressed and the scenario of a greater trade conflict, especially between the United States and China.

China’s imports from the region grew at a remarkable rate in the first quarter of 2019 and continued to be the most dynamic. Although with a clear tendency to slow down, they rose more than 18% in the first quarter of the year. On the other hand, exports from Central America suffered a strong slowdown between the end of 2018 and the beginning of 2019, and it is estimated that the year-over-year rate in the first three months of the year was 2.1%, after growing 9.4% in 2018. At the regional level, only Barbados, Costa Rica, Ecuador, Haiti, Jamaica, Mexico, Dominican Republic and Suriname saw positive rates of variation in their exports at the beginning of 2019.

In Canada, the increase in exports and the decline in imports in April helped reduce the trade deficit in goods to 966 million Canadian dollars (US $721 million), informed the Canadian Statistics Department in June, as a last sign that the economy is recovering from a slowdown. The trade deficit for April was the smallest in six months. Canadian exports grew 1.3% as shipments of metallic and non-metallic mineral products increased 15% due to higher gold sales to Britain and Hong Kong. Canada, one of the leading oil exporters, has been greatly affected in recent years by lower oil prices and higher energy production in the United States. Canada has only experienced two trade surpluses since October 2014. Canola exports fell 14.7%, as shipments to China stopped in the middle of a diplomatic dispute. Wheat exports, however, increased 21.7%. Canada sent 74.5% of all its exports of goods to the United States in April.

In Mexico, exports totaled US $39.447 billion in April, which translated into a 6.1% annual increase and the reactivation of this indicator, since in March it fell 1.2%, ending a 28-month streak of continued growth. Mexican exports have been driven mainly by demand in the United States and, in recent months, due to the US tariffs on Chinese imports. One of the most positive data this month is the 2.2% growth of exports in monthly terms, with seasonally adjusted figures. Thus, exports were replenished by the 2.0% decline (in the same indicator) that occurred in March, but also consolidate the second highest growth in the last 12 months. Regarding its two major items, oil exports totaled US $2.251 billion in April, down 14.3%; while non-oil exports amounted to US $37.196 billion, a 7.6% increase, at annual rates. Mexican imports increased 1.6% in April, reaching US $38.077 billion, while Mexico experienced a surplus of US $1.370 billion.

Brazil registered a trade surplus of US $6.422 billion dollars in May, 5.8% more than the US $6.073 billion recorded in the same month of 2018. This is the third best result for the fifth month of the year, after May 2017, when a trade surplus of US $7.661 billion was recorded; and 2016, when the surplus was US $6.430 billion dollars. With May’s results, Brazil’s trade surplus accumulated in the first five months of the year was US $22.806 billion dollars, 5.9% lower than the same period of 2018. In May, exports totaled US $21.394 billion dollars, 5.6% higher than in May 2018, according to the daily average criteria. Sales of manufactured goods grew by 29.5% in the same year-on-year comparison, and exports of semi-finished goods by 15.4 percent.

Chile registered a trade surplus of US $371 million in May, amid a setback in the value of copper shipments, its main product, according to the Central Bank of Chile. Copper exports totaled US $3.088 billion in the fifth month, representing a year-on-year fall of 2.3%. Meanwhile, exports totaled US $6.353 billion, a yearon-year decrease of 2.3%, while imports dropped 1.7% to US $5.982 billion.

Colombia’s National Statistics Depart- ment revealed that the value of Colombia’s exports rose 2.2% in April to US $3.866.7 billion, compared to the same month last year, favored by a surge in sales of oil and its derivatives. The variation surprised most analysts who projected a decline and was better than the March balance, when exports yielded 0.8% or US $3.337 billion. Sales of oil and its derivatives, the largest generator of foreign exchange in the country, rose 22.2% year-on-year in April to US $1.701 billion, while volume in- creased 16%. In contrast, the value of coal exports contracted 24.7% year-on-year and coffee exports fell 10.6%.

The bilateral trade between the countries does not have to be balanced, and that trade deficits are not bad per se.

In Peru, exports totaled US $14 billion be- tween January and April 2019, which re- flected a 6% drop compared to the same period of the previous year mainly due to the lower price of metals. Sales abroad of the traditional sector reached US $10 bi- llion, 9% less than in the same period of 2018; although in volume there was a 1% (12 million ton) increase. This was explai- ned by the price of Peruvian products that saw a decline in the international market, a trend that will continue in the following months according to analysts. The mining sector, the main driver of Peruvian ex- ports, saw lower sales abroad totaling US $8.1 billion, reporting a substantial drop of 14% compared to the same period of 2018 when there were US $9.4 billion and 9.2 million tons in shipments.

Argentina, in the first 4 months of 2019 managed to reverse a deficit of US $3.259 billion and transform it into a surplus of US $3.147 billion. It meant a turning point after just one year of more than US $6.4 billion dollars, although a fall in international prices weakened fo- reign exports. So far, the surplus in terms of foreign trade generated by the exchange with the rest of the world was supported by the drastic contraction in the volume of

imports, 29.1% in April, which, accompanied by a decrease in product imports by Argentina, generated a decrease in the total amount of 31.6%, to US $4.174 billion dollars. With the numbers in blue, President Mauricio Macri has affirmed that the country never had so much export momentum as it does now and he highlighted the 170 new markets opened to Argentina in recent years.

Venezuela’s oil exports suffered another setback in May after many of its customers reduced their purchases in order to comply with U.S. sanctions. Sales of crude oil and refined products fell 17% to 874,500 barrels per day, mainly due to the difficulty of selling the heavy crude that used to be destined to U.S. refineries. Venezuela sent a total of 33 orders in May, mainly to Asain markets. Exports to India fell to around 187,000 barrels per day, while those destined for China remained above 450,000 barrels.

AFRICA, READY FOR TAKE OFF In international trade there is always a life beyond the threats of Donald Trump. On May 30th, the Continental Free Trade Area of Africa (AfCFTA) came into force, which involves some 1.2 billion people and creates the largest free trade area in the world since the foundation of the World Trade Organization (WTO) in 1995. The agreement seeks to take advantage of the vertiginous growth of a young population, promote trade between the countries of the continent and rely less on fluctuations in the prices of raw materials that constitute a large proportion of its exports. The countries have pledged to eliminate tariffs on 90% of goods, a process that can take several years.

The combined GDP of the continent is US $3.4 trillion. So far thel 54 member states of the African Union have signed the agreement except Eritrea, Benin and Nigeria; the latter the largest economy and the most populous of Africa. With the creation of a free trade zone on the continent, the problem of fragmented economies in African countries that continue to form small markets compared to the rest of the world, is expected to be resolved. AfCFTA could help attract long-term and large-scale investments in the region, generate employment, offer greater opportunities for businesses and benefit consumers to contribute to sustainable development.