TWN Info Service on WTO and Trade Issues (Apr18/10)
16 April 2018
Third World Network
  
Strong growth at risk from escalating trade tensions, says WTO
Published in SUNS # 8662 dated 16 April 2018

Geneva, 13 Apr (Kanaga Raja) - World merchandise trade growth is expected to remain strong this year and in 2019, but this outlook could be compromised by escalating trade tensions (notably between the United States and China), th e World Trade Organisation (WTO) has cautioned.

In their latest trade statistics and outlook released on 12 April, WTO economists projected world merchandise trade in volume terms to grow 4.4% in 2018 and moderating to 4.0% in 2019 (see below). They attributed the faster trade expansion to stronger economic growth across regions, led by increased investment and fiscal expansion.

However, cautioned the WTO economists, "there are signs that escalating trade tensions may already be affecting business confidence and investment decisions, which could compromise the current outlook."

"The strong trade growth that we are seeing today will be vital for continued economic growth and recovery and to support job creation," said WTO Director-General Roberto Azevedo, in a press release.

However, the Director-General warned, "this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation."

"A cycle of retaliation is the last thing the world economy needs. The pressing trade problems confronting WTO Members is best tackled through collective action. I urge governments to show restraint and settle their differences through dialogue and serious engagement," he added.

At a media briefing on 12 April, Azevedo said the outlook that is being published is quite positive. "It reflects the stronger economic growth that we are seeing in both developed and developing countries, and which is forecast to continue, " he said.

"But let me be clear, these forecasts do not - and I repeat they do not - f actor-in the possibility of a dramatic escalation of trade restrictions," Azevedo pointedly said at the media briefing.

"Our aim is to highlight the main factors currently driving trade" and to suggest possible outcomes, "not to peer into a crystal ball and predict possible policy decisions," the DG maintained.

On the forecast for 2018 and 2019, Azevedo said that continuing from last y ear's strong performance, "we see economic conditions converging to allow sustained growth in trade and output. And this applies for both this year and next."

"Consumer and business confidence have turned upwards and economic growth i s synchronized across regions. When all of these cylinders are aligned and fi ring together, the engine performs much better."

Estimating that world merchandise trade volumes will grow nearly as fast in 2018 as it did in 2017, Azevedo said "we expect that growth will remain quite strong in 2019 at around 4.0%."

"So this is good news. It represents the best run of trade expansion since before the crisis, supporting economic growth, development and job creation around the world."

"But of course, risks to the forecasts are significant, and they are predominantly on the downside," Azevedo cautioned.

"Monetary policy is likely to become less expansionary and financial conditions may become tighter, and this could produce some volatility in markets and capital flows."

To reflect this uncertainty, "we placed these forecasts within an indicative range of possible outcomes."

"However, I stress again that even this range does not take into account the more significant risk before us," said Azevedo.

The DG highlighted the "rise in tensions that we are seeing between some trading partners."

Without mentioning any of the countries concerned or even what the said measures are, the DG said that "some measures have already been implemented ; some are still proposals," and the "possibility of further escalation remains hypothetical at this stage, but a reality nonetheless."

"However, it seems that even the threat of further escalation may already be having an effect," said Azevedo, pointing out that in March, purchasing managers indices indicated a slowdown in export orders. At the same time, a separate index of economic uncertainty has risen, he added.

"It is not possible to accurately map out the effects of a major escalation but clearly they could be serious," said Azevedo.

"A breakdown in trade relations among major players would derail the recovery that we have seen in recent years threatening the ongoing economic expansion and putting jobs at risk," he added.

He further said that "it is an interconnected economy and in this kind of economy the effects would be globalised reaching far beyond those countries who are directly involved. Poor countries would stand to lose the most."

"So, we have to do everything we can to avoid further escalation," said the DG, adding that, "I have been urging WTO members to take every action possible to avoid going down this road."

"The WTO was created as a forum for members to hold each other to account and they have been doing so effectively for many years."

"We must safeguard this strong growth that we are seeing today and ensure that trade remains an engine for economic growth, job creation and development around the world," Azevedo said (see SUNS #8661 dated 13 April 2018).

Asked at the media briefing if a trade war between the major players has already started, Azevedo said that "technically, I would say No, we are not there y et. There are still a number of measures that have been announced but not implemented."

The DG added that there are conversations and dialogues ongoing between these players. "That's technically. Politically, I think we might be seeing the beginning of that. And that's exactly what I have been urging members to try to avoid."

Asked to comment on President Trump's trade advisor Peter Navarro's and Secretary of Commerce Wilbur Ross' remarks about wanting countries to balance their trade deficits with the US and agree to reciprocal tariffs, Azevedo said that it's their view and they are entitled to that.

"I think we live today in a very interconnected world. About two-thirds of trade is connected somehow to the global value chains. So, the previous perception of what a trade deficit or trade surplus meant has to be looked under different lenses in today's world."

"I think we cannot be very simplistic about these things. We have to look a t the nature of the trade surplus and deficits. I am sure they are doing that. But I cannot second-guess what their conclusions are from that exercise," said the DG.

Asked whether, in light of the threat to the WTO system as a whole, he had received reassurance from Dennis Shea, the new US ambassador to the WTO,  Azevedo said that he did have a "first contact" with the new US ambassador in Geneva.

He said "we did already have one conversation here in Geneva. I didn't hear anything that conflicted with what I had already heard from my previous contacts with the US administration."

Azevedo maintained that the US has been engaging at several levels here in Geneva, particularly with dispute settlement where they have been bringing cases to the WTO.

"They are making proposals in negotiations. They are participating in conversations about issues like e-commerce. They are negotiating [on] fisheries subsidies."

"They are sitting down. Their engagement is going to continue as I understand," he said, adding that he has also heard from the US "the assertion that the WTO is an important institution. It has delivered many benefits to the global community."

"I have also heard the US being very critical and claiming that we need to improve the dispute settlement system [and that] we need to improve the disciplines. Well, that's their expectations," said the DG.

"I think other members are talking to them. It's about the members, that they have to figure out what is the best way forward. Those conversations are happening both in the WTO and outside the WTO, as it normally is."

"So, we had the conversations about these tensions, about these measures an d these threats at the General Council. We had it in the Dispute Settlement Body. We had it in the Safeguards Committee. We had it in the Goods Council."

"They are happening everywhere in the organisation. Consultations are happening. They are talking to each other," Azevedo maintained.

"But also outside the WTO I think they are talking to each other. They are engaging at some level. We are not privy to that kind of engagement - what happens exactly outside the WTO. But, that's the way that it is always done," he added.

"The WTO, I hope, will continue to be a forum for engagement and conversations. But if the members want to talk outside the WTO directly to each other, that's also welcome. What is important is that they do talk to each other."

The DG was also asked to comment on the US Section 301 actions against China (for alleged "unfair trade practices") and whether the US would need approval from the DSB to get the go-ahead on imposing tariffs on Chinese goods following a previous WTO ruling on Section 301 (DS152, a dispute raised by the EU against the US in 1998).

Azevedo replied that members have different views about these things. "I cannot say which member is right, which member is wrong."

"What is important is that they are talking, they are consulting," he said, noting that there was a request for consultations on this particular measure.

Citing the 60-day period before action is taken in terms of litigation, Azevedo said, "let's see what we see as an outcome of that."

Asked to comment on his remarks that the poorest would lose the most in a trade war, and the fact that some sectors in Brazil like sardines are celebrating that they can export more to China (as a possible result of a trade war), Azevedo said that every time that you see turbulence in terms of trade and measures being put in place, there are sectors that are happy about it and there are sectors that are unhappy about it.

"That is the nature of the situation," he said, adding that what the WTO as an organisation is concerned is about the systemic effect.

"It's about the overall outcome. And the situation is that if we do see the rise in tensions and these threats being announced here and there, the probability is that the volatility of markets is going to accentuate. That the unpredictability of investments, for example, is going to have a dampening effect on economic growth, on job creation."

"And that's what concerns us. And we hope that we tone that down as much as we can because we do not necessarily have to see measures come to the implementation phase. Even before they are implemented, markets react and the economy may be affected," said the DG.

The DG was also asked to comment on how the current political crisis in Brazil will affect trade and growth.

On the issue of political instability in Brazil, Azevedo said: "I am not is a position to measure up how the actual effects would materialise in the case of Brazil. But obviously, investments and economic growth benefit from political stability."

"So, the more stability you see, the better it will be for the country."

Asked about China's efforts to promote multilateral trade, Azevedo said tha t China has been a very active WTO Member.

It has been participating pretty much in all conversations and negotiations defending its interests, said the DG, adding that this is normal as every one of the 164 members do precisely that.

He also pointed out that China has announced several times that it is supportive of the system and that it will continue to engage within the framework of the WTO, "which is very much welcome."

"I hope that China will continue this kind of engagement [and] will sit down constructively discussing with other members issues that have been raised also about Chinese practices and regulations and I welcome the disposition of th e Chinese government to sit down and talk and discuss these issues seriously, " said Azevedo.

STRONG TRADE GROWTH FORECAST

According to the WTO economists, the WTO anticipates merchandise trade volume growth of 4.4% in 2018, as measured by the average of exports and imports, roughly matching the 4.7% increase recorded for 2017.

Growth is expected to moderate to 4.0% in 2019, below the average rate of 4 .8% since 1990 but still firmly above the post-crisis average of 3.0%.

The trade volume growth in 2017, the strongest since 2011, was driven mainly by cyclical factors, particularly increased investment and consumption expenditure.

Looking at the situation in value terms, growth rates in current US dollars in 2017 (10.7% for merchandise exports, 7.4% for commercial services exports) were even stronger, reflecting both increasing quantities and rising prices.

"Merchandise trade volume growth in 2017 may also have been inflated somewhat by the weakness of trade over the previous two years, which provided a lower base for the current expansion," the WTO economists said.

Until recently, risks to the forecast appeared to be more balanced than at any time since the financial crisis, said the WTO economists. "However, in light of recent trade policy developments they must now be considered to be tilted to the downside."

Increased use of restrictive trade policy measures and the uncertainty they bring to businesses and consumers could produce cycles of retaliation that would weigh heavily on global trade and output, they said.

Faster monetary tightening by central banks could trigger fluctuations in exchange rates and capital flows that could be equally disruptive to trade flows.

Finally, worsening geopolitical tensions could be counted on to reduce trade flows, although the magnitude of their impact is unpredictable.

"Technological change means that conflicts could increasingly take the form of cyber-attacks, which could impact services trade as much or more than goods trade."

On the other hand, there is some upside potential if structural reforms and more expansionary fiscal policy cause economic growth and trade to accelerate in the short run.

"The fact that all regions are experiencing upswings in trade and output at the same time could also make recovery more self-sustaining and increase the likelihood of positive outcomes."

The WTO economists said trade growth in 2018 is most likely to fall within a range from 3.1% to 5.5%.

However, it should be noted that the above estimates depend on current forecasts of GDP. "Further escalation in trade restrictive policies or other shocks that negatively affect global economic activity could result in trade growth outside of this range," they cautioned.

World real GDP at market exchange rates is projected to grow 3.2% in 2018 (up from 2.8% last September) and 3.1% in 2019.

"Brighter prospects reflect not only investment and employment gains but al so improved business and consumer confidence as measured by OECD business cycle indicators, although these could be undermined by uncertainty going forward."

The final figure of 3.0% for world GDP growth in 2017 was also stronger than the previous estimate (2.8% as of last September), which partly explains the fact that actual merchandise trade growth of 4.7% for the year exceeded even optimist ic assessments (e.g. 3.6% in September, with a high end estimate of 3.9%).

Despite the improved outlook, some structural factors that weighed on trade in recent years are still present, said the WTO economists.

This includes the rebalancing of the Chinese economy away from investment (which has very high import content) and toward consumption (which has lower import content compared to investment), as well as the reduced pace of glob al trade liberalization in recent decades.

"China's rebalancing might dampen imports slightly in the short-run but it should produce stronger, sustainable growth over the long term, which would support more trade."

On the other hand, the lack of further substantive liberalization would be expected to produce subdued trade growth in both the short and long-run.

Historically, said the WTO economists, world merchandise trade volumes have grown around 1.5 times faster than world real GDP at market exchange rates. The ratio of trade growth to GDP growth (referred to as the "elasticity of trade with respect to income") rose above 2.0 in the 1990s, but fell back to 1.0 in the five years following the financial crisis (2011-2016). This elasticity measure rebounded from 0.8 in 2016 to 1.8 in 2017, which is close to the historical average.

Stronger trade growth relative to GDP growth is expected to continue at lea st into 2018, barring major economic shocks.

Preliminary data suggest that trade is off to a strong start in 2018, the W TO economists said. The WTO's most recent World Trade Outlook Indicator (February 2018) pointed to above-trend trade growth in the first quarter, while other indicators such as export orders and container shipping are also suggestive of an ongoing recovery.

"Tighter labour markets and modest increases in inflation in major economies will leave less room for error on the part of policy makers, but absent any missteps trade growth should remain strong over the next two years."

The acceleration of world merchandise trade volume growth to 4.7% in 2017 from 1.8% in 2016 was broad based, driven by rising import demand across regions but most notably in Asia.

The largest gains were recorded on the import side in developing economies, where trade growth surged to 7.2% in 2017 from 1.9% in 2016. Import demand also picked up in developed countries, albeit less dramatically, as merchandise trade growth in volume terms increased to 3.1% in 2017 from 2.0% in 2016.

Meanwhile, merchandise exports grew 3.5% in developed countries and 5.7% in developing countries last year, up from 1.1% and 2.3% respectively in the previous year.

"Although merchandise trade volume growth was stronger in developing countries for the whole of 2017, exports and especially imports of developed countries strengthened over the course of the year while trade growth in developing economies was more stable," the WTO economists pointed out.

Year-on-year growth of imports was considerably stronger in developed countries in the second half of 2017 (4.3%) than in the first half (2.3%), while growth eased slightly in developing economies (6.0% in the second half, down from 7.2% i n the first half).

Export volume growth in developed countries also increased from 3.4% to 4.3 % between the first half and second half, while growth in developing countries picked up slightly from 5.2% to 6.4%.

The recovery of merchandise trade volumes in 2017 was widely shared across regions but this was especially true on the export side, where North America, South and Central America and the Caribbean, Europe and Asia all recorded stronger growth. Asia and North America saw steady year-on-year growth in imports throughout 2017, whereas import growth accelerated over the course of the year in Europe (1.4% in the first half, 4.1% in the second half) and South and Central America and the Caribbean (1.5% in the first half, 6.6% in the second half).

Asia had the fastest trade volume growth of any region in 2017 on both the export side (6.7%) and the import side (9.6%) following two years of tepid expansion.

North American exports and imports rebounded strongly in 2017 with growth of 4.2% and 4.0%, respectively, after stagnating in 2016. South and Central America and the Caribbean's import growth turned positive again in 2017 with an increase of 4.0%, following three years of steep declines. Meanwhile, European trade flows continued to expand at a moderate pace, with growth of 3.5% for exports and 2.5% for imports in 2017.

"Other regions," encompassing Africa, the Middle East and the Commonwealth of Independent States, saw steady export growth of 2.3% in volume terms due to the fact that demand for oil and other natural resources tends to be quite stab le in quantity terms.

The WTO economists noted that energy prices more than doubled since January 2016, but even at nearly US$70 per barrel oil prices still remain below the US$100 level that prevailed before the middle of 2014.

Asia was responsible for much of the recovery of world merchandise trade in 2017 on both the export and import sides. On the export side, Asia contributed 2.3 percentage points to global growth of 4.5% in the latest year, or 51% of the total increase. Asia also added 2.9 percentage points to world import growth of 4 .8, or 60% of the overall increase.

North America made substantial positive contributions to exports and import s as well, after adding very little to trade growth in 2016 as internal and external demand faltered. Europe added less to merchandise import growth in 2017 than it did in 2016, but South and Central America and the Caribbean made a positive contribution for the first time since 2013 as Brazil exited its recession.

According to the WTO economists, no single factor can explain the revival of world trade in 2017 but several contributed to it, including increased investment spending, which is highly correlated with trade, and higher commodity price s, which raise incomes in resource-based economies and encourage investment in the energy sector, e.g. shale oil in the United States.

They said investment made a negative contribution to GDP growth in the United States in 2016 and negligible contributions to growth in Japan and the United Kingdom for the year, but all three saw investment rebound to varying degrees in 2017.

"The fluctuations in the United Kingdom may have been partly due to the uncertainty introduced by the Brexit referendum, and the fact that this uncertainty was partly alleviated in 2017. However, the long-run impact of Brexit on trade and investment remains to be seen."

The WTO economists noted that China's economic rebalancing away from investment and toward consumption is continuing, with investment accounting for roughly 32% of GDP growth in 2017, down from 55% in 2013.

"This development may add some drag to world trade growth as China imports fewer capital goods, but the process has so far been gradual and not very disruptive to global trade."

Less investment could also help reduce overcapacity in sensitive sectors such as steel and aluminium, thereby alleviating trade tensions, they said.

They also said the dollar value of world merchandise exports was up 11% in 2017 to US$17.20 trillion, while world commercial services exports increased by 7% to US$5.25 trillion in the same period.

OUTLOOK FOR THIS YEAR AND NEXT

According to the WTO economists, some leading and coincident indicators of merchandise trade continued to point in a generally positive direction in t he first quarter of 2018 while others have taken a negative turn.

An index of container port throughput was close to its highest level ever recorded in February, suggesting strong trade growth. However, a measure of global export orders derived from purchasing managers' indices dipped in March, falling t o 51.8, its lowest level since December 2017.

"A value above 50 still indicates expansion, but the recent weakening could be attributed to rising anti-trade rhetoric."

Balanced against these broadly positive signs is a rising tide of anti-trade sentiment and the increased willingness of governments to employ restrictive trade measures. "Recent measures have been applied to widely traded goods supplied by a large number of countries, with counter actions promised if these go into effect. An escalating cycle of retaliation may yet be avoided if negotiations manage to diffuse tensions, but this is not guaranteed," the WTO economists said.

They pointed out that another major risk is an unanticipated hike in inflation in one or more countries, which could cause monetary authorities to raise interest rates precipitously and cause economic growth to slow, with negative consequences for trade.

The United States Federal Reserve is already in the process of raising interest rates closer to historical norms while the European Central Bank is moving closer to phasing out its own stimulus measures. Economic forecasters generally expect monetary authorities to manage these challenges successfully, but with less room to manoeuvre some financial volatility could come to the fore if conditions change, they said.

Assuming current forecasts for GDP growth come to pass, the WTO expects world merchandise trade volumes to increase by 4.4% in 2018, with stronger growth in developing economies in both exports (5.4%) and imports (4.8%). Developed countries should also see fairly strong growth on both the export side (3.8%) and the import side (4.1%).

In 2019, global trade growth is projected to moderate to 4.0%, with developing economies still outpacing developed countries in both exports (5.1% compare d to 3.1%) and imports (4.4% compared to 3.3%).

"However, economic activity would also be expected to take a hit from escalating trade restrictions, which could result in more negative scenarios being realized," said the WTO.