The Trade War Keeps Pushing Global Trade Growth to A Halt

It appears that the trade tensions between China and the United States has no end. Since the outburst in May, all efforts to reach an agreement have proven abortive.  Even after the June 28 and 29 G-20 summit in Japan, the expected truce agreement between President Trump and President Xi is still being anticipated. However, even if a positive conclusion is eventually reached, the probability of removing the existing tariffs is very low. Consequently, Atradius feels there may be a pause in the international trade growth. The longer this lingers, the harder it becomes to undo the disaster that will occur against global trade.

Trade encountered a standstill in Q1 of 2019, and since Q4 of 2009, it has been the weakest quarter for global trade growth. The stagnation was caused by the rollover from Q4 of 2018. Besides the negative impacts of increasing protectionism, the weaker economic growth, poor financial conditions, and financial market volatility have held back trade in developed countries’ economies. In Q1 of 2019, economic growth has increased tremendously, particularly as fiscal stimulus supports Chinese import demand, and in most developed markets, their central banks have reversed or put their plans of financial tightening on hold. This slowdown has a temporary nature that support Atradius’ outlook that trade growth should recuperate after the all-round weakness experienced in 2018. Retaliatory measures and new tariffs are not very temporary, but as previously discussed; trade is seen to adjust to them. The slowdown’s temporary nature can better be considered in trade momentum figures, especially in Rising Asia.

Nevertheless, as the year started weak, the previously forecasted 2.7 percent in the Atradius Economic Outlook is no more guaranteed. Considering the Q1 data and even the lingering trade war that seems unending, Atradius’ current expectation is that in the remaining days of this year (2019), the structural recovery in trade flows could just increase world trade growth to 2.0 percent. These drivers are expected to continually support growth in 2020, leading to a 2.8 percent trade growth. However, with the massive amount of trade still under high tariffs and critical policy uncertainty, there is a high downside risk associated with this outlook.

The United States has incurred costs from the trade war, which may not stop or discourage it from standing firm with its trade policies against China. While the possibility of reaching a short-term truce after the G-20 meeting is possible, trade tensions may not fade totally and current tariffs should stay in place. The United States administration and Congress are ready to consider a stronger position on structural issues that cannot be resolved easily, for instance, intellectual property violation, involuntary technology transfer, and elevating policy uncertainty. Therefore, there is relatively no hope for global trade, as seen in Atradius outlook.