The collateral damage of the United States’ trade wars is being felt from the fjords of Iceland to the auto factories of Japan.
Central bank governors and finance ministers traded grim tales of suffering economies at the International Monetary Fund and World Bank fall meetings in Washington this week. Some also noted how far US policy had shifted from the 1940s, when Washington co-founded the IMF.
At that time, “the world economy had been hammered for over a decade by high tariff barriers, depression and war,” prompting then-US Treasury Secretary Henry Morgenthau to champion a global economic system, World Bank President David Malpass told attendees at a session this week.
The US message then, Malpass said, was: “First, there’s no limit to prosperity. Second, broadly shared prosperity benefits everyone.”
As the IMF’s gathering of 189 member-nations drew to a close, the unintended negative impacts of the trade wars were becoming clear, IMF Managing Director Kristalina Georgieva said. “Everybody loses.”
The United States, the world’s largest importer, started a bitter tariff war with China, the world’s largest exporter, 15 months ago. US President Donald Trump is also in the midst of renegotiating, and sometimes upending, trade relationships with many of Washington’s top trading partners.
The fallout will slow global growth in 2019 to 3.0%, the slowest pace in a decade, the IMF estimated this week.
This pain is not being shared equally. The United States remains the least exposed of the world’s 20 largest economies to a drop in exports in part because of its massive domestic consumer spending base.
EUROPE’S PAIN
The damage is being particularly felt in European countries which “rely on exports and are open to trade,” the European Union’s Economic and Financial Affairs Commissioner Pierre Moscovici said.
More than 40% of Germany’s GDP was derived from exports in 2018, the most of any major global economy. Uncertainty in the business community is widespread, German Finance Minister Olaf Scholz told reporters.
German trade group BGA recently revised down its growth forecast for German exports in 2019 to just 0.5%, from 1.5%. As a result, many companies are scaling back their investment plans, something that will have repercussions for years to come.
Scholz said concerns over Britain’s impending departure from the EU and the bloc’s trade dispute with the United States were clearly dampening global economic growth.
“The most important problem remains those factors that we cannot measure – specifically the reluctance to invest,” Scholz said.
The pain is being felt in countries that don’t rely on exports too, such as Iceland, which became the first developed economy to seek aid from the IMF after a 2008 banking collapse. Since then, it has rebuilt its economy in what’s been called a miraculous recovery. Now, that is threatened.
“We have become dependent on tourism,” explained Ásgeir Jónsson, the governor of Iceland’s central bank, with annual visitors growing five-fold to 2.5 million since the crisis. Foreign arrivals, however, have plummeted since the trade wars started, and are down 15.6% this summer from the year before.
Iceland, with a population of about 300,000, built foreign currency reserves on the back of the increase in visitors, he said, but those are dropping too.
Trade links between countries have led to a more peaceful world in recent decades, but recent experience shows “you can never take global trade for granted,” Jónsson said.
NO AMERICAN IMMUNITY
On Friday, Japan’s Cabinet Office, which helps coordinate government policy, downgraded its assessment of factory output in October.
The softness in production was largely due to car exports to the United States turning weaker, after growing steadily until the spring, a government official said at a briefing.
“The pick-up in global growth is being delayed,” Bank of Japan Governor Haruhiko Kuroda said. “Japan’s economy is seeing exports weaken significantly and that’s affecting factory output.”
The United States hasn’t been immune from the impact of the trade wars. American farmers have been particularly hurt by Chinese tariffs on US agricultural products, prompting the Trump administration to give billions in aid to the farm belt.
Washington’s imposition of steel and aluminum tariffs and uncertainty about passage of a new North American free trade deal – the United States-Mexico-Canada Agreement – have also stalled local economic development.
Christopher Cabaldon, the mayor of West Sacramento, California, said bids for a $100 million infrastructure project in the city came in 80% higher than expected in part because of construction firms’ need to factor in higher costs and the risk of additional tariffs in the future.
“Even in small cities like my own, we see the impacts of trade. We have come to realize the deep integration of our local economies in the global system,” Cabaldon told Reuters ahead of the IMF and World Bank meetings.
“Most of my economic development plans … are playing out on a global stage, not down the freeway.”
EMERGING MARKETS DISENGAGE
The trade tensions are helping to spur a push among African nations to create a more self-reliant continent. “We must take it upon ourselves to grow trade among ourselves,” said Ukur Yatani Kanacho, Kenya’s acting cabinet secretary for treasury.
Abdoulaye Daouda Diallo, the finance minister of Senegal, told reporters the U.S.-China trade tensions would affect African nations in the energy sector and cut funds available on financial markets. The dispute underscored the importance of the African Continental Free Trade Agreement, he said.
Other emerging markets are also coming under pressure.
“Ukrainian exporters faced worsened conditions in global commodity markets,” which drove down steel prices, said Kateryna Rozhkova, the deputy governor of the country’s central bank.
Making matters worse, “the intensification of geopolitical conflicts led to rising oil and natural gas prices in the world,” she said.
Bahrain’s Finance Minister Sheikh Salman bin Khalifa Al Khalifa said the Gulf region was also affected by trade tensions and the resulting slowdown in investment, although geopolitical concerns – about Iran, for example – were another major factor.
“Trade tensions create uncertainty and nobody is insulated from uncertainty,” he told Reuters.
Peru cut its 2019 economic growth estimate to 3% in August, from 4.2%, citing trade factors. Mexico is edging closer to a recession that its officials say might be more difficult to reverse than during the last downturn more than a decade ago.
“The Great Recession basically caught everybody by surprise, but economies were willing to cooperate and work together to pull it out,” Mexican Finance Minister Arturo Herrera said. “This slowdown is taking nobody by surprise, but there is very little appetite for cooperation.”
