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Trump tariffs threaten to undermine world trade

by December 27, 2016 General

AS world trade and investment have plateaued, globalization is barely alive. America’s new protectionism could destabilize the world economy.

In the recent Central Economic Work Conference, stability became the common denominator for China’s economic planning in 2017. Meanwhile, US President-elect Donald Trump chose Peter Navarro, a long-standing China basher, to head the newly-created National Trade Council. Concurrently, the Trump team proposed a 10 percent import tariff, which is likely to trigger a trade conflict between US and China — and many other nations.

At the peak of globalization, the Baltic Dry Index (BDI) was often used as a barometer of international commodity trade. The index soared to a record high in May 2008 reaching 11,793 points. But as the financial crisis spread in the advanced West, it plunged by 94 percent to 663 points. As China and other large emerging economies chose to support the ailing advanced economies through G20 cooperation, the US, the EU and Japan pledged they would accelerate reforms in global governance. At the same time, they launched massive fiscal stimulus and monetary easing. So the BDI soared to 4,661 in 2009.

However, as promises of reforms were ignored and stimulus policies expired, the BDI bottomed out at 1,043 in early 2011, amid the European sovereign debt crisis. Curiously enough, the advanced economies’ ultra-low interest rates and massive injections of quantitative easing have not been reflected by the BDI, which continues to stagnate, as do the advanced economies.

Last February, the Index reached a historical low of 290 but rose to almost 1,260 in the fall, fueled by the globalization efforts of China-led G20 in the fall. But after Trump’s protectionist moves, the index has plunged again — 25 percent in one month. The indicators of global investment and trade herald even gloomier prospects.

By the 1870s, capital and trade flows rapidly became substantial, driven by falling transport costs. However, this first wave of globalization was reversed by the retreat of the US and Europe into nationalism and protectionism between 1914 and 1945. After World War II, trade barriers came down, and transport costs continued to fall. As foreign direct investment (FDI) and international trade returned to the pre-1914 levels, globalization was fueled by Western Europe followed by the rise of Japan.

After 1980 many developing countries broke into world markets for manufactured goods and services, while they were also able to attract foreign capital. This era of globalization peaked between China’s membership in the World Trade Organization (WTO) in 2001 and the global recession in 2008 — when China and large emerging economies spared the world economy from a global depression.

But as the G20 cooperation dimmed, so did global growth. Before the global crisis, world investment soared to almost US$2 trillion. In the current year, global FDI will decline, while world export volumes reached a plateau already two years ago. At the same time, the third leg of globalization, global migration, is plunging in developed economies and stagnating in developing countries.

In 2017, the Trump tariffs will pave way to greater protectionism, which is likely to be amplified after several key elections in Europe. As a result, the supportive effect of world trade and investment may deteriorate further.

We are about to witness a major clash between America and the rest of the world, particularly the emerging economies which today fuel global growth prospects. And that’s why the world economy will pay the bill.

Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see Shanghai Daily condensed the article.