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Financial markets today are in a state of high alert, responding spasmodically to an onslaught of shocks on both a macro and a company level.

Among these, protectionism has been a central and recurring villain.

Just how bad might the “year of the tariff” turn out to be?

The good

There are two sides to every ledger, and – believe it or not – some countries are still trying to strengthen international trade rather than undermine it.

The recently announced Trans-Pacific Partnership trade pact (sadly, minus the US) is a major step forward. The European Union has also penned important deals with Canada and Japan. China – the worlds other superpower – is opportunistically seeking to fill the void left by a retreating US.

Negotiations around the North American Free Trade Agreement (Nafta) – which have long been a grim affair – have suddenly bounded forward after the US surprisingly eased its demands on the domestic share of auto production, its controversial proposal for a sunset clause, as well as the pacts dispute resolution mechanism.

Those issues were among the key roadblocks to a deal.

Granted, there is more work to be done, and it remains unclear what concessions Canada and Mexico have made. There could yet be a last- minute hitch (whether premeditated by wily US negotiators, or impulsively imposed by a certain President).

But while the risk of Naftas destruction was once as high as 40 per cent, this has now fallen to just 15 per cent. That doesnt guarantee the final deal is economically positive, or even benign, but it does limit the damage.

Let us also recognise that the US is not entirely incorrect in its trade grievances. American exporters do, on average, pay higher tariffs than foreign firms entering the US market.

If the recent barrage of US tariffs is instead viewed as being a temporary wedge designed to pry open foreign markets, globalisation could actually be advanced rather than impeded by these unorthodox tactics. Of course, this is a best-case interpretation, but not an impossible one.

Investors should also be relieved to learn that recently proposed trade barriers are set to impose surprisingly little economic damage. For instance, based on the actions taken so far, the trade spat between the US and China will cost each economy less than a quarter of one per cent of their economic output.

The bad

Of course, whenever protectionism is in play, there is often quite a lot of “bad” news.

First, protectionism has long since morphed from words into action, with US tariffs now in place on softwood lumber, washing machines, solar panels, steel, and aluminum. Just as President Trump promised and delivered tax cuts, he is now clearly acting upon his protectionist mandate.

The odds of further action rise as his more moderate advisers fall by the wayside.

Second, the latest Chinese tariffs are much more significant than anything that has come before, in part because of the size of the tariffs – a 25 per cent tax on $50bn of imports – and because China is proving to be an equally pugilistic adversary.

Read more: China will fight US "at any cost" after Trump mulls $100bn in extra tariffs

Third, even for aggrieved countries that seek redress through the proper channels (such as filing a dispute with the World Trade Organisation), any remedy is slow to come, and the medicine might just be worse than the disease. They are told to impose their own tariff on the trade bully.

Fourth, the US is even further off the globalisation course than its recent tariffs would suggest, having also failed to sign several deals that were previously full-steam ahead – including the aforementioned Trans-Pacific Partnership, and a deal with Europe.

Fifth, the protectionist trend is not limited to the US. The British decision to flee the EU is another prominent example.

Subtly, a number of other countries have been skirting trade rules by fortifying their non-tariff barriers.

The ugly

My best guess is that protectionism will merely act as a pesky drag on global growth, avoiding outright economic carnage.

But alternate scenarios abound, and one must acknowledge something like a 20 per cent chance of a rather uglier outcome: a full-blown trade war. This might not be full-on recessionary, but it could certainly suck all of the juice out of recent US tax cuts.

The scenario goes as follows. It is far from clear whether the US is done conjuring Chinese tariffs. To the contrary, the current tariffs merely respond to Chinas steel glut, and the countrys questionable intellectual property practices. China can also be accused of subsidising and shielding a slew of other sectors.

President Trump is already threatening another round of Chinese tariffs. And while it takes two to wage a trade war, China has proven its willingness to punch back.

To reiterate, a more muted – if shabby – trade outcome is still the most likely scenario.

But alongside an ageing business cycle, protectionism must surely be acknowledged as the key macro risk for the coming year.

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