Moneycontrol Pro Panorama | Global trade will survive Trump, with bruises

Donald Trump

Dear Reader,

Global trade has never been the same since the COVID-19 pandemic. The rise of multiple polarised camps of countries has made cooperation a dirty word and protectionism as a duty to one’s country. At the heart of protectionism are tariffs. Tariffs are not bad; in their best version, they allow a country to remove unnecessary differences between goods manufactured domestically and those coming from across the border if they are similar in nature. Tariffs foster a robust domestic manufacturing sector. But, at their worst, they are the bluntest tool in a trade war with another country.

That said, the rising anxiety in anticipation of the tariff deluge President-elect Donald Trump is expected to unleash could be a tad overdone. Sure, Trump has promised to impose tariffs on all trading partners and put the steepest price on China to counter its heft. However, tariffs are not new and are unlikely to upend global trade completely. What is critical is how they are designed. In this FT piece, free to read for Moneycontrol subscribers, Marieke Bloom, chief economist at ING, argues that tariffs need not be inflationary for the US as companies can reroute goods through other countries.

Also, under the first Trump administration, tariffs did not result in a lot of reshoring, but more of rerouting of trade. To be sure, global trade growth decelerated to 1.4 percent in 2019 from 4.3 percent in 2018 after tariff impositions. But growth nosedived due to the pandemic and has remained tepid, thanks to regional wars. The weakening of global trade was not entirely due to tariffs, but more because of breakdown in supply chains post the pandemic. The upshot is that the narrative of tariffs as a shock to the economy and resulting in higher inflation, interest rates, and higher fiscal deficits could be misplaced. Tariffs hurt in the long term and slowly but are unlikely to dent global trade significantly in the short term. “The consequences of deglobalisation will show up in the slow erosion of long-term productivity and economic wellbeing. It will leave us all poorer in the long run,” Bloom writes in his piece.

The World Trade Organisation has raised its forecast of global trade growth to 2.7 percent for 2024 and has said growth could climb to 3 percent next year if Middle-East tensions subside. More than tariffs, wars dent global trade by making the passage of goods and services dangerous.

What about countries at the receiving end of tariffs?

For countries on whom tariffs are imposed, especially China, historically countries have countered this by weakening their exchange rates. China is likely to again bring down the renminbi to increase export competitiveness. As such, China’s exports surged in October as companies rushed to stock up before Trump hit them with tariffs. Most emerging market currencies are on a downward movement, including the Indian rupee.

The outcome of tariffs may not be entirely on trade, but more on other markets as collateral damage. Exchange rate wars are being anticipated now since emerging market economies now must make their goods competitive. Latin American economies won’t be far behind as the Mexican peso is already near its lowest in two years. China’s dour economy will suit its depreciating renminbi, but Beijing is already burning midnight oil to counter the tariff trouble ahead. Its influence is already increasing in Latin America while that of the US is seen as waning.

A lot of rerouting, haggling, diplomacy (a la G20 interactions) and friend-shoring will happen over the next two years as Trump powers ahead with his agenda. India is already making its own pitches with friendly countries. Prime Minister Narendra Modi’s visits to Nigeria, Brazil and Guyana must be seen in this context. Energy is at the centre of global trade and India is putting in efforts to diversify its sources amid regional wars. We detailed how Modi’s efforts must be seen in this piece here.

Meanwhile, the motor oil that keeps the global trade vehicle smooth is the exchange rate. India’s central bank is sticking to its policy of regular intervention to prevent undue volatility in the currency. Accused by some of eroding the rupee’s competitiveness relative to peers, the Reserve Bank of India (RBI) has argued that forex intervention has not surged and is commensurate with the increase in the size of the country’s economy and the market’s heft.  Our piece here details the RBI’s defence and our Chart of the Day highlights the flipside of the rupee becoming overvalued in trade terms.

While tariffs may be a slow poison, eroding the benefits of globalization and free trade, exchange rate wars are more worrisome as they spread quickly to other markets through capital flows. A currency war, if begun by China to counter tariffs, could force new dilemmas onto emerging market economies. Note that inflation hasn’t been vanquished in many emerging markets (EMs) and exchange rate tweaks would only complicate matters.

Tariffs are a silent killer of productivity, and their effects are felt more deeply in the long-run. But in the short term, they tend to create disturbances in markets by forcing the hands of policymakers of countries to choose quick fixes and damage controls. That would be the unfortunate outcome of Trump’s tariffs rather than a sharp downturn in global trade.

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