Slow Trade Growth, America’s Tariff Fallout, and Implications for Sri Lanka

April 16, 2019        Reading Time: 6 minutes

Reading Time: 6 min read

Image Credits: Nazly Ahmed/ flickr

Anushka Wijesinha*

Around this time last year, economists were enthusiastic that the global economy was in a ‘synchronised upswing’,¹ with steady growth expected in both developed and emerging markets. However, fast forward one year, the trade tensions triggered by the US have cast a cloud over these bright prospects, and the latest forecasts are pointing to lower global GDP growth and world trade growth.

Weak Global Trade

Earlier this month, the World Trade Organization (WTO) cut its forecast for world trade volume growth in 2019 by more than one percentage point, to 2.6%.² In September of last year, it forecasted 3.7% growth for this year.³ 2018 was already a slow year for trade, with global trade growing at just 3.0%, well below the original WTO forecast of 3.9%.⁴ The WTO points to the trade tensions between the US and China, and the resultant economic impacts, as the prime culprit for this.

Less than impressive GDP growth in major economies, including the US, Europe and China, has also contributed to the trade slowdown. Earlier this year, the International Monetary Fund’s World Economic Outlook Update⁵ noted that ‘global expansion has weakened,’ and forecast global GDP growth of 3.5% in 2019—a reduction of 0.2% from its previous forecast in October 2018. The decision by the US Federal Reserve to take a more dovish stance on interest rates, and postpone any further rate hikes is another indication of the concerns around the US, and indeed global, economic growth.

This is some way from the ‘synchronised upswing’ in global growth that was expected early last year. In fact, the most recent indications suggest that we are more likely in a ‘synchronised slowdown’ instead. The latest Brookings-FT Tracking Index for the Global Economic Recovery⁶ points to slowing momentum across much of the global economy.

America’s Trade Stance

The defining feature of the fragile trade climate in the world today is President Trump’s trade stance towards China. On 6 July 2018, the US imposed 25% tariffs on USD 34 billion of imported Chinese goods,⁷ which then led China to respond with similarly sized tariffs on US products. In mid-August, tariffs on an additional USD 16 billion of Chinese imports was added⁸ and China responded proportionately. And in early September, a further tariff on USD 200 billion of Chinese goods was imposed,⁹ to which China responded with tariffs on USD 60 billion of US goods.

By the end of last year, however, there appeared to be some respite. Following the G20 Summit in Buenos Aires in early December, President Trump agreed to pause raising tariffs (from 10% to 25%) on USD 200 billion of Chinese goods for a period of 90 days¹⁰ from 1 January 2019, to allow for talks. Even as the end of March deadline has passed, there is no firm deal reached between the US and China, although reportedly one seems close.¹¹ Yet, President Trump stirred market jitters once again in mid-March when he warned that even after a deal, he may decide to ‘retain tariffs for a substantial period.’¹²

Costs of Protectionism

As was predicted from the outset, a trade war creates more losers than winners, and interesting new evidence has recently emerged on the costs to the US economy. While this evidence focuses on the US, it is also instructive in thinking more generally about the costs of trade protection. Two new papers by eminent economists, in particular, have provided the first real estimates of the impact of increased import tariffs on the American economy. Both find that US consumers are the worst off, both from reduced choice and higher prices.

The first study ‘The Impact of the 2018 Trade War on U.S. Prices and Welfare,’¹³ co-authored by three economists from Columbia University, Princeton University, and the Federal Reserve Bank of New York, finds that the full incidence of the tariffs has fallen on American domestic consumers (i.e. complete pass-through of the US tariffs into US domestic prices), and consequently American consumers’ real income had fallen by USD 1.4 billion per month by the end of 2018. In total, it estimates that there was a cumulative deadweight welfare cost (i.e. reduction in real incomes) from the US tariffs of around USD 6.9 billion during the first 11 months of 2018. They also found that US producers responded to reduced import competition (because of the protection afforded by import tariffs) by raising their prices, further hurting domestic consumers as well as producers who use these goods as inputs. These are classic examples of the costs of import protection.

The second paper, ‘The Return to Protectionism’¹⁴ by economists at UCLA, National Bureau of Economic Research, Yale, World Bank and Columbia Business School, finds similar results. They estimate an annual loss for the American economy of USD 68.8 billion due to higher import prices. Notably, they find a horizontal supply curve for imports, suggesting that US consumers bear the incidence of US tariffs. Meanwhile, they estimate gains of USD 21.6 billion from higher prices received by US producers. The redistribution from buyers of foreign goods to US producers and the government nets out to a negative effect on the American economy of USD 7.8 billion on an annual basis; 0.04% of GDP.

Their study found some interesting distributional effects as well. Their finding that the tariff protected sectors concentrated in electorally competitive counties (tight race between Republican and Democrat) is not entirely surprising. But what it is revealing—and indeed quite significant when considering the possible political fallout of the tariffs—is that foreign retaliatory tariffs affected sectors that are concentrated in Republican counties (for instance, agricultural workers like soybean farmers). Most interestingly, their computations show that workers in tradable sectors in heavily Republican counties experienced the largest losses. Now it would be very interesting to see, in the Presidential Election 2020, how these economic impacts play out in the polls.

Fallout, but also an Opportunity

The trouble with the ongoing trade tensions is that it creates a huge amount of uncertainty for businesses regarding the overall international trade environment, leading to a postponement of investment decisions, upheaval of supply chains, and a general cloudiness on the future outlook. This naturally impinges on developing countries like Sri Lanka, who are takers not shapers of the global trade order.

Moreover, reduced real incomes among American consumers—on account of the costs of the trade war—impact their purchasing power and consequently their demand for goods from abroad. Although the fiscal stimulus that President Trump’s ‘Tax Cuts and Jobs Act’ provided some counterbalance and did boost consumption during much of 2018, the effects have already begun to wear off.¹⁵ All of these elements necessarily have an impact on countries like Sri Lanka that rely heavily on the US market for its exports.¹⁶

The silver-lining, however, is that Chinese outward investment is now aggressively focused on developing countries in Asia. Chinese companies seem to be ‘taking cover’ from the US tariff onslaught by commencing investments in countries that have not been hit by US tariffs, such as Indonesia, Vietnam, the Philippines, and Bangladesh. According to the data published by the Asian Development Bank (ADB) earlier this month,¹⁷ greenfield investment by Chinese companies in other ‘developing Asia’ countries spiked to USD 54.9 billion in 2018, up 198% from the previous year. Out of total Chinese outward investment, this accounted for 60%, up from a 2011-17 average of 40%. As such, there are opportunities for Sri Lanka to gain from the ongoing shift in the international trading environment, provided it looks proactively at attracting investment that is looking for new locations.

For this, Sri Lanka needs to redouble its domestic reforms through a four-pronged agenda: (i) a meaningful and bold tariff and para-tariff removal programme, (ii) a proactive and focused investment attraction effort (with a special emphasis on firms and sectors looking to exit China and seek new destinations), (iii) an accelerated export promotion programme to help Sri Lankan firms go global, and (iv) an ambitious and fast-tracked effort to improve the ease of doing business and trade facilitation.

Notes

¹International Monetary Fund. (2018). World Economic Outlook, April 2018, Cyclical Upswing, Structural Change. [Online]. Available at: https://www.imf.org/en/Publications/WEO/Issues/2018/03/20/world-economic-outlook-april-2018 [Accessed 8 Apr 2019].

²World Trade Organization. (2019). Global trade growth loses momentum as trade tensions persist. Press Release 837. [Online] Available at: https://www.wto.org/english/news_e/pres19_e/pr837_e.htm  [Accessed 8 Apr 2019].

³World Trade Organization. (2019). WTO downgrades outlook for global trade as risks accumulate. Press Release 822. [Online] Available at: https://www.wto.org/english/news_e/pres18_e/pr822_e.htm [Accessed 9 Apr 2019].

⁴World Trade Organization. (2019). Global trade growth loses momentum as trade tensions persist. Press Release 837. [Online] Available at: https://www.wto.org/english/news_e/pres19_e/pr837_e.htm [Accessed 9 Apr 2019].

⁵International Monetary Fund. (2019). World Economic Outlook Update, January 2019, A Weakening Global Expansion. [Online] Available at: https://www.imf.org/en/Publications/WEO/Issues/2019/01/11/weo-update-january-2019 [Accessed  9 April 2019].

⁶The Brookings-FT. (2019). April 2019 update to TIGER: World economy lurches from uneven recovery to synchronized slowdown. [Online] Available at: https://www.brookings.edu/research/april-2019-update-to-tiger-world-economy-lurches-from-uneven-recovery-to-synchronized-slowdown/ [Accessed 7 Apr 2019]

⁷Wong, D. and Koty, A. C. (2019). The US-China Trade War: A Timeline. China Briefing. [Online] Available at: https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/ [Accessed 7 April 2019].

⁸Ibid.

⁹Ibid.

¹⁰Xin, Z. and Carter, J. (2018). US and China reach 90-day trade tariff ceasefire after China agrees to buy ‘very substantial’ amount of American goods. South China Morning Post. [Online] Available at: https://www.scmp.com/economy/china-economy/article/2175987/trump-and-xi-agree-trade-war-truce-and-no-extra-tariffs [Accessed 8 Apr 2019].

¹¹Krasny R. and Han, M. (2019). Trade Deal Moves Closer as China and the U.S. Plan More Talks. Bloomberg. [Online] Available at: https://www.bloomberg.com/news/articles/2019-04-06/u-s-china-trade-talks-to-forge-ahead-amid-progress-xinhua-says [Accessed  7 Apr 2019].

¹²Davis, B. and Ballhaus, R. (2019). Trump Says Tariffs on Chinese Goods Will Stay for ‘Substantial Period of Time. Wall Street Journal. [Online] Available at: https://www.wsj.com/articles/tariffs-on-chinese-goods-to-remain-in-place-for-period-of-time-trump-says-11553101862/ [Accessed 8 Apr 2019].

¹³Amiti, M., Redding, S.J. and Weinstein, D. (2019). The Impact of the 2018 Trade War on US Prices and Welfare (No. w25672). National Bureau of Economic Research. [Online] Available at: http://www.princeton.edu/~reddings/papers/CEPR-DP13564.pdf [Accessed 8 Apr 2019].

¹⁴Fajgelbaum, P.D., Goldberg, P.K., Kennedy, P.J. and Khandelwal, A.K. (2019). The Return to Protectionism (No. w25638). National Bureau of Economic Research. [Online] Available at: http://www.econ.ucla.edu/pfajgelbaum/RTP1.pdf [Accessed 8 Apr 2019].

¹⁵Gleckman, H. and Boddupalli, A. (2019). What 2018’s Economic Data Tell Us About The TCJA. Tax Policy Center. [Online] Available at: https://www.taxpolicycenter.org/taxvox/what-2018s-economic-data-tell-us-about-tcja [Accessed 9  Apr 2019].

¹⁶Trade Map (2019). List of importing markets for a product exported by Sri Lanka. [Online] Available at: https://www.trademap.org/Country_SelProductCountry_TS.aspx?nvpm=1%7c144%7c%7c%7c%7cTOTAL%7c%7c%7c2%7c1%7c1%7c2%7c2%7c1%7c2%7c1%7c1

[Accessed 9 Apr 2019].

¹⁷Asian Development Bank. (2019). Asian Development Outlook 2019: Strengthening Disaster Resilience. [Online] Available at: https://www.adb.org/sites/default/files/publication/492711/ado2019.pdf#page=50 [Accessed 9 Apr 2019].

*Anushka Wijesinha is an Economist and serves as an Advisor to the Ministry of Development Strategies and International Trade. The opinions expressed in this article are the author’s own and not the institutional views of LKI, nor do they necessarily reflect the position of any other institution or individual with which the author is affiliated.