Fear of US-China trade war underpins global economic growth

2018 was one of the most turbulent years for global economic relations. The trade war launched by President Donald Trump in the spring of this year, uncertainty associated with Brexit, blocking the functioning of the World Trade Organization, stagnation of the negotiations on bilateral and multilateral agreements, and the growing number of non-tariff trade barriers - these are just a few issues that made the passing year difficult for entrepreneurs.

  • Concerns in relation to the global trade in 2019? These include an escalation of the conflict between China and the US, tariff duties on cars and car parts, collapse of the World Trade Organization (WTO) and future free trade agreement with Great Britain after (the uncertain) Brexit.
  • Lights in the tunnel? Entry into force of agreements with Japan, Singapore and Vietnam, as well as finalization of negotiations on trade agreements with Mercosur, Mexico and Chile.
  • Hope or a concern? Elections to the European Parliament and the new European Commission.

There is a high probability that the current political and economic tensions will affect the rules of conducting international business in 2019.

We should think about the aspects that need special attention: where are the risks and opportunities for exporting companies? Especially considering that in the upcoming year the number of unknowns will be particularly high, forcing enterprises to devote more time to monitor the dynamic geopolitical situation.

Escalation of the conflict between China and the US

The relations between two largest economic powers will be in a sense determined by the global trade relations. And so - despite the agreement concluded by President Trump and President Xi at the G20 summit in Buenos Aires in December 2018 - the situation between these two economies still remains tense.

The US gave the competitor 90 days to find a solution to the negative trade balance and unfair practices used by China (subsidies, technology transfer, etc.). Otherwise, the US is ready to impose additional tariffs, worth $ 250 billion, for products exported from China.

The question then is how both economies could solve the existing impasse in 2019. Trump has repeatedly insisted that he wants to see “structural” changes in the Chinese economy that will lead to a more well-adjusted trade balance. Washington also calls for the end of a huge network of subsidies and cheap state loans that fuelled China's economic growth and the international march of “state” champions.

It is not clear whether President Xi would ever be willing to make such concessions. Especially considering that it was also due to “capitalism with a Chinese face” that this country could flourish in the last 30 years. Therefore, the issue remains open.

The consequences of this conflict for the Union and companies of the Member States may be twofold: some see it as a chance to double the exports of products subject to additional tariffs to China and the US, or to increase the willingness of both economies to negotiate an agreement with the EU as a “neutral” player.

At the same time, the dispute could lead China to further opening of the market for EU investors - for example through licenses to run a business without having to enter a joint venture.
Others are afraid that a commercial war will affect everyone, as modern supply chains are so interdependent that some players cannot be eliminated without consequences for others.

Donald Trump and Xi Jinping: where do they bring world trade in 2019? (photo: shutterstock)

 Tariff duties on cars and car parts

From Europe's point of view, the risk that the United States will introduce tariffs on cars and car parts up to 25 percent is even more important than the escalation of the US-China conflict. Currently, the Union, together with Japan or Korea, is the largest car exporter to the other side of the pond.

The report of the Tax Foundation estimates that such high tariffs could lead to the loss of more than 31.000 jobs in Europe; in Poland it could lead to the loss of nearly USD 180 million - due to the participation of Polish companies in the production chains of the European automotive sector.

As in the case of steel and aluminium duties, Trump wants to base their imposition on the Section 232 “national security clause”. The fact whether the imported Subaru or Porsche is a threat to US security is of course debatable...

Canada and Mexico have already secured exemptions from any new tariffs under the negotiated North American Free Trade Agreement (NAFTA 2.0). The European Union, however, does not have such a mechanism, which is why it is insistently trying to ease bilateral relations - through negotiations of sectoral tariff agreements or further American LNG import licenses to Europe.

Collapse of the World Trade Organization (WTO)

Almost the whole world is part of the customs war that the United States began at the beginning of 2019. Under normal circumstances, the World Trade Organization - as the guardian of the global economic order - would be the most appropriate body to address the current tensions. However, the conscious decision of the US to block the appointment of judges of WTO's arbitration court, as well as the reluctance to carry out reforms puts us all in a stalemate, where the law of the stronger prevails over reason and compromise. 

Thus at the end of next year, the WTO may cease to exist... Despite the efforts of the Union and several other allied countries, attempts to reform the current system remain helpless. If the black scenario came true, we would go into a state of lawlessness, where companies would not be able to settle cases related to dumping issues, unfair subsidisation practices or discriminatory treatment of trade partners - and there would be a complete “lawlessness” when pursuing trade policy.

As a result, it is the risk of the WTO's collapse that should make us all concerned - and it is on this matter that the European Union and the Member States should focus in the coming year.

Brexit – future free trade agreement

Finally, Brexit... From an internal challenge, it becomes probably the most difficult challenge for EU trade policy in 2019. Although it has been almost two years since the commencement of negotiations on the British exit from the European Union, many issues still remain unresolved; the risk of exit without any agreement remains relatively high.

In the optimistic scenario, at the end of March both sides would begin negotiations on a trade agreement that would enter into force after the end of the “transition period” (2020 or 2022). There are many people who call them “the worst agreement in history”, as it is the first time the country agrees to get less access to a third country market than it had before starting the negotiations.

Consequently, two scenarios regarding future relations are considered: a trade agreement similar to CETA (elimination of tariffs, while maintaining differences in e.g. regulations) or an extended Norwegian model: the United Kingdom will remain in the Customs Union and the Single Internal Market which would be more beneficial for companies on both sides of the Western Channel, but difficult to accept politically, because in effect Britain would become a “vassal” of the Union - with no possibility of influencing decisions taken in Brussels.

Moreover, as with a divorce settlement agreement, the unity of the Union was an easily attainable necessity. If the negotiations on the trade agreement were launched, the particular interests of the member states would come out and make the whole process more difficult.

Theresa May appears as the lonelist politician in Europe (photo. shutterstock)

Entry into force of agreements with Japan, Singapore and Vietnam

However, there are some good news for the European business in the coming year. In 2018, the Union showed that it is able to negotiate and ratify trade agreements in times of growing protectionism.
After 5 years of negotiations and a consent of the European Parliament and EU Member States, it is assumed that the agreement with the second largest Asian economy – Japan – will come into force as early as February of next year. The European Commission estimates that because of the EU – Japan agreement, EU companies will be able to save about 1 billion euros a year, and exports to Japan will have the potential to increase by up to 13 percent.

At the same time, following several years of suspending the ratification process of trade agreements with Singapore and Vietnam, the two agreements are also expected to come into force in the coming year. Which - together with the decision to launch trade negotiations with the outermost economies of Asia and the Pacific: Australia, New Zealand and Indonesia - will close a certain circle of EU regional impacts that can provide various export benefits for years to come.

This is even more important given that at the same time the United States, together with the presentation of the TPP agreement, announced the end of treating East Asia as a priority, leaving room for a new leader.

Finalization of negotiations on trade agreements with Mercosur, Mexico and Chile

For 20 years, the Union has been unsuccessful in negotiating a trade agreement with the Mercosur countries (Argentina, Brazil, Paraguay and Uruguay). Last year it was said that the agreement will be signed relatively soon. As a result, the discussions will be continued and should end in 2019.
Reaching an agreement in the coming months would send not only a strong political signal – the Union would be the only block that would be able to sign an agreement with Mercosur – but would also bring significant development benefits to Polish and European export companies.

Mercosur represents the market of 300 million consumers, with a constantly growing middle class. Additionally, the South American community has one of the world's most closed economies with high tariffs (a 35 percent tariff on vehicles, a 14 percent tariff on pharmaceuticals, a 35 percent tariff on clothing, a 20-35 percent tariff on machines) and countless non-tariff barriers that significantly hinder bilateral exchange.

These issues could be solved thanks to the EU-Mercosur agreement.

At the same time, the Union is modernizing its trade agreement with Mexico and Chile, adding new elements, such as protection of intellectual property, regulatory cooperation and trade in services. Consequently, it can be seen that after several years of the Union's march to the East, the Community also wants to ensure its presence and preferential trade conditions in the Western Hemisphere.
Hope and concerns: Elections to the European Parliament and the new European Commission
Of course, the responses to threats and opportunities presented above will be somehow defined by the new Parliament and the European Commission (which will be appointed in the middle of the next year). The number of populist and anti-EU members might significantly increase, which may potentially hinder the Parliament's decision-making process and change its current relatively “pro-commercial” nature.

The President of the European Commission will change along with the new Parliament. The next Trade Commissioner will have a difficult task. The European Union has so far concluded agreements with 70 countries, which together constitute 40 percent of the world's GDP, but it still has not managed to get close to the three most important global players: the United States, India and China, where profits from free trade agreements for the Community would be the largest.

After the collapse of TTIP and the election of Donald Trump as president, we entered the period of "cold war" in trade relations with the US. Despite the commencement of bilateral talks, the chance of warming of relations in the next 12 months is relatively small. The case is similar with China. Discussions regarding the bilateral investment agreement have been underway for 6 years and it is difficult to expect significant progress in the near future.

And finally, India – Asian economy with a young society, fast growing investments in IT, almost 8 percent economic growth – appears to be a very promising market. However, the country is still subject to high tariffs, multiplying non-tariff barriers, which makes the access to India difficult for European players. Its interest in signing comprehensive trade agreements is also low.
The Union's involvement in trade dialogues with India should therefore be a priority for the EU.

Jean-Claude Juncker (first on the left) and Donald Tusk's terms of office end next year. Donald Trump still has time until 2020. Photo public domain.jpg

What happens next?

The macroeconomic situation in global markets, after a few years of recovery from the crisis in 2008, does not encourage optimism. The world economy is expected to increase by about 3.2 percent compared to 3.5 percent in 2018. Declines should be expected in the EU, US or Chinese economies.
The International Monetary Fund also reduced its forecasts for the global volume of trade: the overall flow of goods and services is expected to increase by 4.2 percent in 2018 and 4 percent in 2019, and global direct foreign investments may decrease by several percent. If the US raises customs tariffs on all Chinese goods to 25 percent and China takes retaliatory measures, by 2021 the world's GDP could fall by 0.5 percent.

The probable collapse of the World Trade Organization may hang dark clouds over the trade for several years.

Moreover, if the negative trend lasts longer, we can expect further disruptions in supply chains – entrepreneurs will prefer to focus on local markets and safe trade routes to keep income under control, rather than risk entering foreign markets that are unstable. Such a situation will not only affect their profitability, but will also affect an increase in prices for consumers.

The material was printed from www.wnp.pl. © Polskie Towarzystwo Wspierania Przedsiębiorczości (Polish Entrepreneurship Support Association) 1997-2018


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