It is shaping up to be an uncertain year for global trade, thanks to the continued trade slowdown, possible changes in US policy, and the general rise in protectionism – or, at least, protectionist rhetoric, which won’t translate into immediate restrictions but certainly won’t help to remove existing ones.
1. Sluggish trade will continue, hitting poorer countries hardest
Global trade, which has been slowing since the 2008 financial crisis, will likely continue to slow down in 2017. Even though global income may rise, this won’t translate into stronger import demand.
Why not? First, the integration of production into global value chains, which has boosted trade in inputs and intermediate goods by locating stages of production in different countries, has reached its maturity.
Second, commodity prices have declined in the past three years (having been on the rise until the financial crisis). This is reducing the value of trade and the import demand in the main exporters of commodities, notably developing countries. Although some exporters are reacting to the fall in prices by cutting production, it is unlikely that the rise in prices will benefit all commodity exporters and in the same way as before.
Third, a generalised rise in protectionism in both developed and developing countries is also affecting global trade – more on this below.
Sluggish trade hits developing countries hardest. Given their small economies, they rely heavily on trade. And the slowdown seriously constrains their ability to produce for export, limiting their economic transformation strategies.
2. Trump won’t find it easy to live up to his protectionist campaign promises
US President-elect Donald Trump has showed no sign of toning down his protectionist rhetoric. He has promised to scrap Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations with the European Union, and the Trans Pacific Partnership (TPP).
He has also said that he wants to renegotiate the North American Free Trade Area (NAFTA) with Canada and Mexico and that he aims to increase import duties of products coming from China and Mexico. He even wants to punish firms that take production out of the US.
All this sound pretty scary. However, as I argued just after his election victory, it isn’t quite as dramatic as it sounds.
First, the TTIP and TPP are already effectively dead; formally scrapping them will have little impact now.
Second, raising import duties is not that easy. Other countries can retaliate against the US if it violates its World Trade Organisation (WTO) commitments. And the operation of value chains between the US and China will likely mean that barriers on Chinese imports will also hit US firms.
Third, Trump will face domestic opposition in introducing some of these radical changes, including from the US Congress despite it being dominated by the Republican Party.
Nevertheless, Trump is likely to take some bombastic measures to fulfil his campaign promises, especially at the start of his term. For example, the US government will try to introduce some safeguards in NAFTA, especially on products imported from Mexico. But the integration of production within NAFTA means these measures will still harm US firms, and will face resistance domestically.
3. Increasing anti-globalisation and protectionist measures
Countries have been applying new protectionist policies since the financial crisis; G20 countries in particular. While tariffs remain low, countries are increasingly using other type of barriers to restrict trade, such as non-automatic licenses. Other measures work informally by asking firms not to import.
Although the anti-globalisation rhetoric of both the Trump election and Brexit may prompt an increase in trade restrictions, this probably won’t translate into governments introducing additional barriers, at least in 2017. WTO commitments and other domestic concerns will prevent it.
But the anti-globalisation stance will hinder efforts to reduce trade barriers globally. Wealthier countries in particular will be less inclined to make further multilateral commitments and to engage in free trade negotiations. Meanwhile many developing countries are expected to increase their reliance on protectionist measures to support their industrialisation processes.
So while many of the fears unleashed in 2016 may not be realised – at least in the short run – 2017 will be a difficult year for global trade.
Governments need to understand that protectionism helps neither domestic development nor foreign partners. The G20 should lead by example, implementing concrete actions to boost trade.
Meanwhile, developing countries will have an opportunity to address the most important trade issues at the WTO ministerial in Buenos Aires in late 2017. Together with wealthier countries, they should work to remove existing trade barriers; the last thing they should do is to react to the storm by increasing protectionism.