Global trade faces protectionist headwinds that are dampening the outlook for growth in the coming years. According to the World Trade Organisation (WTO), trade volume grew by 3% in 2018 and is expected to decline slightly to 2.6% in 2019 before rebounding back to 3% in 2020. This may be the first time since the 2007-08 global financial crisis that growth will fall below the 3% average. Nevertheless, significant uncertainty driven by an escalating US-China tariff war, acrimonious Brexit negotiations and wariness surrounding US involvement in several multilateral trade agreements is affecting business confidence and investment decisions.
Nevertheless, although US protectionist measures and President Donald Trump’s fiery rhetoric currently dominate global headlines, trade blocs in Latin America, Asia Pacific and Africa are creating exciting new multilateral trade areas. Furthermore, several major bilateral trade agreements have been ratified or are in the pipeline and are expected to further boost trade.
President Trump has taken an unconventional policy direction on trade, engaging in tit-for-tat tariff wars and withdrawing from major multilateral agreements like the Trans-Pacific Partnership (TPP). In trying to encourage US consumers to purchase local goods and by imposing taxes on imports from major economic partners such as China, the EU, Canada and Mexico, President Trump’s administration has started challenging and overhauling the free trade policies that have governed US economic policy for decades. The Trump administration has previously claimed that the global trade system was unfair and prejudicial to US companies, arguing that its trading partners were imposing excessive tariffs on the US and stealing its intellectual property.
The IMF has previously forecast that trade wars could cut global growth by 0.5% by 2020 and Morgan Stanley estimates that it could reduce global GDP by around 0.8%. An ongoing tariff war between the US and China has escalated during the second half of 2018 and most of 2019. As of August 2019 the US had imposed a 25% tariff on $250bn worth of Chinese imports, with plans to introduce a 10% tariff on an additional $300bn worth of Chinese goods the following month. Meanwhile, Beijing responded with tariffs on $110bn worth of US exports, including aircraft and coffee. With neither side seemingly willing to de-escalate the situation, further tariffs are expected. Washington has warned of increased tariffs on additional imports if China continues to retaliate. Beijing cannot match US tariffs because its imports from the US total around $130bn, far below its the $500bn of exports to the country. Nevertheless, China can still respond by disrupting US businesses operating in the country and by undervaluing the yuan. In fact, in August 2019 China devalued its currency in order to offset the impact of the trade restrictions.
Furthermore, trade relations between Mexico, Canada and the US have also come under strain following trade tariffs amid the backdrop of the North American Free Trade Agreement (NAFTA) renegotiations. Immediately after assuming office, President Trump threatened to exit NAFTA unless the US could renegotiate more favourable trade terms. To apply pressure, his administration subsequently hit its North American trade partners with levies on metal imports, imposing a 25% tariff on steel imports and a 10% tariff on aluminium in May 2018. The EU was also hit by the same tariffs and, along with Mexico and Canada, responded with countermeasures targeting US exports, particularly food, steel and alcohol. Renegotiations of the NAFTA pact, which began in May 2017, centred on quotas, labour and procurement laws, and rules of origin. With midterm elections in the US and a change of presidency in Mexico occurring in late 2018, negotiators from the three countries signed a last-minute deal on November 30, 2018 to overhaul the agreement, thereby ending several months of uncertainty.
The revised pact, which has been renamed the US-Mexico-Canada Agreement (USMCA), sees mixed results across industries. North American auto parts manufacturers are expected to benefit, at least in the short term, as new provisions stipulate higher local content requirements for auto and truck parts, a move that is ultimately aimed at curbing the level of Asian imports. Consumers, however, will feel the pinch as the costs of autos, trucks and parts increase. Tech and digital companies are also likely to benefit from stringent and wider intellectual property regulations and digital trade provisions. However, Canadian dairy farmers are set to face increased competition from US producers as the revised pact opens a bigger domestic market share to foreign competition.
Furthermore, new provisions on minimum wages in the auto industry are ultimately designed to disincentivise US and Canadian manufacturers from moving production over to Mexico. OBG spoke to Luis Rossano, a member of the so-called “Cuarto de Junto” private sector team that was involved in the NAFTA renegotiations and CEO of RPC Group, a plastic products design, engineering and manufacturing company operating in the automotive industry. Following the brokering of USMCA, Rossano expects “international investors’ appetite for Mexico’s automotive industry to remain, although with some degree of deceleration, which can also be used as an incentive for resilient Mexican companies to diversify – a long-awaited objective that can also mitigate risk”. Rossano told OBG that the new wage provisions – requiring that 40% of auto parts in North America be manufactured by workers earning at least $16 an hour by 2023 – are in line with already existing NAFTA production dynamics.
In other words, with some minor changes the new guideline targets can easily be reached. This provision is also not pegged to inflation and so an average wage of $16 per hour in 2023 will likely impose less of a constraint than it might today. Overall, Rossano believes that the new pact has largely calmed the investment climate in Mexico, although he acknowledges that “there is always some small degree of uncertainty with this – at times erratic and unstable – US administration”.
In August 2019 US House Democrats were working towards the ratification of USMCA. In June 2019 the revised pact was ratified by Mexico, while in Canada it received its second reading in the House of Commons. If it is ratified by the three governments, the revised pact will be a major political victory for President Trump’s administration. It is also likely to soothe economic volatility in Mexico and President Andrés Manuel López Obrador has publicly stated that he will not attempt to modify the deal. In May 2019 the US agreed to lift steel and aluminium tariffs on Canada and Mexico, removing a major hurdle to ratifying NAFTA 2.0.
Across the Atlantic, Brexit negotiations between the UK and the EU face an uncertain future. With the UK unable to formally leave the economic and political bloc on March 29, 2019, Prime Minister Boris Johnson is now struggling to mobilise support within his own party for a draft of the Brexit deal with Brussels. Prime Minister Johnson is looking to the October 2019 deadline in close discussion with his party and the EU on the future of a deal or no deal with respect to Brexit. Around 43% of the UK’s global trade in 2016, worth about £241bn, was with the EU. Another 12% of total trade is with countries with which the EU has preferential agreements, meaning that the EU Customs Union and the Single Market together account for 55% of the UK’s international trade.
Opening New Doors
An agreement between the US, Canada and Mexico was saved by last-minute negotiations, and despite the potentially negative global trade repercussions of the US-China tariff war and Brexit, 2018 also saw numerous distinctly positive developments. Several new major free trade areas have emerged and negotiations for others are advancing.
Despite President Trump’s 2017 decision to withdraw from the TPP, parties to the original agreement have forged ahead to create a new deal. In March 2018, 11 countries accounting for 13.5% of global GDP signed a new agreement, the Comprehensive and Progressive Agreement for TPP (CPTPP). The deal constitutes the world’s second-largest free trade bloc after NAFTA. Rather than a trade pact in and of itself, CPTPP is more of an umbrella agreement encompassing 18 separate free trade agreements between the member countries. Participating nations are expected to see their economies expand by 1.7% more than they otherwise would have by 2030, according to the Peterson Institute for International Economics. The biggest winners are in Asia, with the economies of Malaysia, Singapore, Brunei Darussalam and Vietnam expected to grow by an extra 2% by 2030, compared to around 1% or less for New Zealand, Japan, Australia, Canada, Mexico and Chile.
The conditions for the activation of CPTPP were agreed to only come into effect 60 days after at least 50% of the signatories ratify the agreement. The pact came into force for six initial countries, including New Zealand, Mexico, Japan, Singapore, Canada and Australia, on December 30, 2018 and for Vietnam on January 14, 2019. As of early August 2019 the four remaining nations – Brunei Darussalam, Chile, Malaysia and Peru – had yet to ratify CPTPP. The signatories have left the door open to other countries interested in joining the pact, with the UK, for example, expressing interest.
China’s Own Course
Apart from the US, China is the other noteworthy CPTPP absentee and has so far preferred to forge its own multilateral trade pacts. China has not shown any interest in joining CPTPP and has instead focused on another major Asia-Pacific trade partnership, the Regional Comprehensive Economic Partnership (RCEP). RCEP is a free trade deal involving the 10 members of the Association of South-East Asian Nations (ASEAN), plus its six dialogue partners (Australia, China, India, Japan, South Korea and New Zealand), which collectively account for 4bn people with a total GDP of $49.5trn.
Technically an attempt to harmonise existing free trade agreements between member countries rather than a new pact, formal RCEP negotiations began in 2012 and were expected to conclude in November 2018. However, disagreements between negotiators, particularly between India and China, have pushed back this timeline. India is wary of opening its economy to an influx of Chinese goods and has called for limited implementation of tariff concessions, a demand China appears willing to accept to save the pact. When ratified, RCEP is forecast to drive 5.1% GDP growth in ASEAN countries by 2021, as well as boost employment and facilitate technology transfer. However, as of the beginning of August 2019 both countries looked unlikely to sign the trade deal.
Decades in the Making
Outside of Asia Pacific, trade blocs in Latin America and Africa are forging ahead with new and promising multilateral partnerships. Negotiations between the EU and the Mercosur group of Argentina, Uruguay, Brazil and Paraguay – the world’s fourth-largest trading bloc – had been ongoing for almost 20 years, and in June 2019 a deal was reached. Bilateral trade between the two blocs exceeded $87.5bn in 2018, according to the European Commission. The EU is Mercosur’s second-largest trade partner, accounting for 21.5% of all its trade, and the EU exports goods worth $45bn to the South American bloc.
Africa’s Trade Potential
Intra-African trade has long been restricted by excessive non-tariff measures. These trade barriers include long waiting times at borders, import quotas, and excessive or complex regulations, among others. Undermined by excessive red tape, intra-African trade stands at less than 20% of total trade compared to 60% for Europe and 30% for ASEAN countries, for example. Recognising the billions of dollars of trade potential not being actualised, 44 African heads of state signed the African Continental Free Trade Area (AfCFTA) agreement in March 2018.
AfCFTA’s goal is to create a single market for goods and services for the 55 African Union (AU) member countries, which have a combined GDP of $2.3trn and 1.2bn people. The AU hopes that greater free trade will boost industrial capacity and investment on the continent so that African economies can move away from their traditional commodity export dependency. More developed industrial African economies such as Egypt are hoping AfCFTA will be a boon for local exporters in industries such as garments and other textiles. Mervat Soltan, chairperson of Egypt Export Development Bank, told OBG that AfCFTA “greatly expands the opportunities for Egyptian exporters” even though they “will be under considerable pressure to meet the demand for lower prices” amid increased competition. For the agreement to come into force, half (or 22) of the signatories had to have ratified the pact through their Parliaments. AfCFTA entered into force in May 2019 after 24 member states ratified the pact, which was officially launched in Niamey, Niger in July 2019. The dismantling of tariffs is expected to start in July 2020. The International Centre for Trade and Sustainable Development expects intra-African trade to increase by as much as 52% by 2022. Following the commitment to AfCFTA made in July 2019 by Nigeria, one of the region’s largest economies, the forecast looks even more likely to become a reality.
Growth in global trade also saw several prominent bilateral agreements fleshed out in 2018. Gearing up for Brexit, the UK has laid the groundwork for bilateral trade talks with various major trading partners, including Canada, China and the US. It has also expressed interest in joining the CPTPP. President Trump’s ongoing shake-up of US trade policy and tariff war with China has seen it making overtures to Japan, which has been a major advocate of multilateral agreements. Trade negotiations between the US and Japan – respectively, the world’s largest and third-largest economies – began in September 2018. The talks between the two countries have the potential to fundamentally reshape the world’s auto industry and grant US farmers greater access to the Japanese market.
Meanwhile, China has been moving forward with its own bilateral trade talks, particularly in the Middle East. In July 2018 China inked a raft of trade agreements with the UAE and Kuwait, as Beijing eyes the Gulf Cooperation Council and Middle East as a gateway for its Belt and Road Initiative. China’s strategic trade partnerships in the region focus on infrastructure, trade facilitation and technology sharing.
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