“Let’s not put too fine a point on it, world trade is about to come under significant threat,” says Gregorio De Felice, chief economist at Italian bank Intesa Sanpaolo.
2017 was actually a successful year, with the volume of global trade in goods and services climbing by 4.2 per cent over the 12 months. According to De Felice, the future looks far from rosy, however. He identifies two key factors as sources of uncertainty: Brexit and President Donald Trump’s deliberately protectionist trade policy.
“Trade is expected to slow markedly across Europe in the next few years, partly because GDP growth above 2 per cent is unsustainable, but also because of the UK’s exit from the European Union,” he says. “The negotiators on both sides have reached a conditional agreement on a transition period that would postpone the consequences of withdrawal beyond the official leave date [of 29 March 2019] until 1 January 2021. However, even if we assume that agreement becomes legally binding, it’s merely delaying the day of reckoning. After that, we reach into the deep unknown.”
The UK will become the first country ever to leave the EU (if we discount Greenland in 1985). It currently boasts the organisation’s second largest economy, smaller only than that of Germany.
‘Trade is expected to slow markedly across Europe in the next few years, also because of the UK’s exit from the European Union’
Gregorio De Felice, Chief Economist at Intesa Sanpaolo
“In 2021, it seems likely that a free trade agreement will be applied to allow all goods – including agricultural food products – to be traded tariff-free between the EU and the UK,” De Felice says. “But what happens after will all depend on the latter’s ability to ensure some form of regulatory alignment with the former.”
Pro-Brexit campaigners in the UK argue that alignment of the country’s laws and regulations with those of the EU’s single market and customs union will mean it is leaving the EU in little more than name, with too much power still devolved to Brussels. However, alignment is seen by many as the only way to guarantee that a “hard border” (of passport and customs controls) is avoided between Northern Ireland and the Republic of Ireland.
A long, tortuous road of negotiation lies ahead, with the ultimate destination impossible to predict. Given the political context, Intesa Sanpaolo tentatively forecasts that annual economic growth across the European Union will fall from 2.5 per cent in 2017 to 1.6 per cent in 2020. “Unless the Brexit project is dropped completely,” says De Felice, “the path does look set to be one of more subdued growth in European trade flows, which will have a negative impact on economic growth, certainly in the medium to long term.”
The second reason for De Felice’s fears for the future of world trade is Donald Trump’s attacks on free trade deals – particularly Nafta (the North American Free Trade Agreement) and TPP (the Trans-Pacific Partnership). Trump made these a constant feature of his 2016 presidential campaign and in office is following through.
In 2017, he withdrew the United States from the TPP, and intense talks are currently under way with partners Canada and Mexico about the fate of Nafta.
The President has also taken a number of protectionist measures against China; initially just on solar panels, timber and washing machines, but now on aluminium and steel imports, too (imposing tariffs of 10 per cent and 25 per cent respectively).
“These tariffs aren’t a worry in themselves,” says De Felice, “but it remains to be seen if things develop into an all-out trade war between China and the US. The Trump administration’s stated objective is to reduce its trade deficit by replacing imports from overseas with American production. In practice, though, this could merely end up promoting an increase in barriers to international trade and unleashing trade wars on several fronts, as other countries adopt a similar approach.”
‘Tariffs aren’t a worry in themselves, but it remains to be seen if things develop into an all-out trade war between China and the US’ – Gregorio De Felice
The US trade deficit currently stands at $568 billion – the highest it has been since 2008. So does De Felice think the President is misinterpreting the reasons for this?
“The deficit is being attributed less to macroeconomic factors – such as excess demand in the US, caused by factors like an excessively strong exchange rate and a lax fiscal policy – and more to what’s thought to be the unfair and discriminatory trading practices of other nations putting the US at a disadvantage.”
In recent months, the Trump administration has made repeated complaints – for instance, that the World Trade Organisation does nothing to prevent ostensibly dubious tactics by China, such as dumping (the export of products at a price that is intentionally lower in the foreign market than the price charged in the exporter’s domestic one).
How worried should the world be by all these developments? “Tariffs are still low and will probably remain so in the next few years,” says De Felice. “But, as with Brexit, there is a chance of repercussions, perhaps very serious ones, in the longer run.”
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