The retreat of globalisation and the rise of smaller club deals
President Trump has praised his own efforts in replacing NAFTA with USMCA – the US-Mexico-Canada arrangement, which will increase costs for US consumers by cutting the amount of cross-border part finished movements especially in automobile manufacturing. The deal is supposed to create more jobs for blue-collar Americans. Time will tell: US auto labour numbers peaked in the late 1970s and have been slowly trending lower ever since.
The deal also contains a poison pill in the form of a clause that obliges Canada and Mexico to ‘fess up should they enter trade talks with a “non market economy”. The term itself does not appear to be defined, though we aren’t privy to the whole text. The implication is nonetheless clear: don’t go flirting with China behind Uncle Sam’s back, or else. The US will insist on inserting the same clause into its trade negotiations with the EU, Japan and post-Brexit UK so that “China does not find a backdoor way to gain access to the US market.”
Ladies and Gentlemen, you pay your money, you takes your choice: you can be a trade partner with China or a trade partner with the US but not both. China assumed it would automatically be given market economy status under WTO rules on 1st January 2016, 15 years after it joined the global trade club. This would cut tariffs and trade barriers for Chinese exporters.
Although its promotion was supported by such free trade luminaries as the UK, a country in the middle of withdrawing its membership of the richest free trade bloc on earth, China has been frustrated in this accomplishment by complaints from the EU and US. China itself disputes the term “non market economy” saying that it cannot be found in any multilateral trade rules, let alone defined. Indeed, the phrase “Market Economy” is open to interpretation under WTO rules.
One might conclude, as the Trump administration clearly has, that the WTO is unfit for purpose and can safely be ignored in pursuit of the national interest. In Japan, Prime Minister Abe says he would welcome a post-Brexit UK into the Trans Pacific Partnership. Although one of President Trump’s first acts was to withdraw the US from the TPP, and despite China being specifically excluded, it still operates with Japan being first among equals. UK membership would give Japanese manufacturers based in the UK some post-Brexit comfort, but they remain uncomfortable with the lack of clarity from either the UK or the EU on what their relationship will be like in the future. Drawing the UK into the TPP might hamper its attempts to sign a ‘superdeal’ with the US, which is currently renegotiating its own trade deal with Japan.
Flying down to Rio, on the starboard side one can see the continuing rise of Jair Bolsonaro. His election prospects have raced along like a stabbed rat, as the unfortunate epithet goes, and he has now run the first round of the Presidential election. Brian Winter, the editor-in-chief of Americas Quarterly, summarises Bolsonaro’s appeal thus: “Donald Trump got elected saying that crime in the inner-cities was out of control, that the economy was a disaster and that the entire political class was corrupt ... All three of those things are indisputably true in Brazil. So if Trump could get elected, imagine what is possible in a country like Brazil right now.”
If Bolsonaro wins, Brazilians can expect closer relations with the US and a cooling of relations with China; Bolsonaro has expressed reservations about the Middle Kingdom ‘buying up’ Brazil. In the 28 October second round election, Mr Bolsonaro says Brazilians must choose between “family God and justice” or becoming Venezuela. What market or trade reforms he will enact remain uncertain, but the chances are that they may not be wholly supportive of global free trade agreements.
All these developments have clearly rattled Beijing’s cage. The strategy is to downplay trade with the US and promote internal consumption. Official statistics show that the China’s foreign trade dependence degree (the ratio of total amount of foreign trade to the country's GDP) has fallen from 64 per cent in the year 2000 to 33.5 per cent in 2017. The State Council says that only 19 percent of China's exports went to the US in 2017, worth USD 250 Bn and that the Chinese exports subject to higher tariff duties imposed by the US account for less than two percent of China's total GDP.
Coming out of the Golden Week holiday, Xinhua reports that “China’s economy has maintained solid growth momentum” while the National Bureau of Statistics has emphasized the 14 per cent increase in consumer spending in the last year. Fixed asset investment, once the engine of Chinese expansion, grew by 5.3 per cent in the year to August, triggered mainly by reduced growth in construction. The Ministry of finance has therefore urged local government to hasten the issuance of special bonds worth CNY 1.35 Tn for construction projects. Meanwhile the People’s Bank of China has taken steps to support domestic economic activity.
The capital reserve ratio requirement (how much money banks must set aside against bad loan risks) has been reduced by one per cent “to optimize the liquidity structure of commercial banks and the financial market and to reduce financing costs.” Some of the liquidity released by this measure will be used to repay CBY 450 Bn of loan interest due on 15th October, while CNY 750 Bn will be made available to support small and micro enterprises “to enhance the vitality and resilience of the Chinese economy, strengthen endogenous growth momentum and promote the healthy development of the real economy” as the PBOC put it.
The Takeaway
The US has effectively killed off the WTO as the arbiter of global trade and other nations are waking up to the new reality of ‘every man for himself’. In China the political reaction has been to play down the importance of trade with the US and indeed with the rest of the world. Instead the banks have taken measures to support domestic trade and consumption. Global commodity markets and traders will have to get used to increased volatility as political decisions reform and re-form markets.