The G20 meeting that concluded over the weekend was significant as it elicited hopes of a resolution of the ongoing and intensifying US-Sino trade war, which in the current year, has reflected in the tit-for-tat import-restrictive tariff hikes from both sides.
But despite President Trump and President Xi’s dinner meetings in which they promised to take no further measures in the new year, the concluding communique of the summit was not encouraging as it avoided mentioning the term “trade protectionism” from the statement.
In contrast, the disappointment appears stark against the last year’s statement, in which the G20 nations agreed that they will continue to fight trade protectionism, including all unfair trade practices, and use the trade defense instruments available within the WTO framework.
It is not that an expressed commitment matters a lot in the current scenario, but the outcome can be ambiguous if the starting point itself bears out no commitment. In fact, during 2018, the number of harmful trade measures initiated by all counties were 940, which accounts for nearly 20% of the cumulative measures enacted globally since the outbreak of the 2008 Global Financial Crisis.
Reports indicate that the reason for the G20 communique going soft on trade protectionism or avoiding a dissent from the BRICS nations is the insistence of the US negotiators. This clearly suggests that the leaders, especially that of China and the US, have come out of the summit without having agreed upon on a common ground about the global trade regime.
On the contrary, the statement appears to have taken a more pro-US stance, supported by major developed nations, such as European countries and Japan, in accepting that multilateral trade was falling short of its objectives of promoting growth and employment. And, all agreed on the need for reforms of the WTO to improve its functioning. The progress on this will be reviewed in the next summit in Tokyo.
So, by default, the burden of arriving at a resolution appears to be falling mainly on China, which is seen as unduly gaining from the current world trade framework using alleged unfair trade practices, such as forced transfer of technology from foreign companies operating in its markets, intellectual property, and a complicated web of benefits given to Chinese state-owned companies. In addition, the increasing control of Chinese investments, through loans, was also seen as a concern in many countries.
The G20 Summit, by failing to muster an express commitment on free trade, deepens the belief that the world might be moving increasingly toward bilateralism as against multilateralism, which is the agenda of the Trump administration. This, however, is in contrast with the small giving in by the US side to admit the need for an acceptable trade regime under the WTO.
Indeed, the strength of the US’s persistent stance on driving global trade in its terms is probably linked to the fact that in the world order now, nations are much less synchronous on economic cycle. And, as things stand now in the Emerging Markets, especially in China, which has been lagging behind in economic momentum compared with the US that is chugging along in a fairly robust manner. Formidable household conditions, including a multi-decade low unemployment rate, gains in compensation and all-time-high net worth of households, lend political strength to Trump to take an aggressive stance on the whole issue of trade protectionism.
Overall, while the financial markets have been fairly hopeful of an amicable scale-down in the US-Sino trade conflict, the conclusion of the G20 Summit did not create much reassurances in this regard.
In the foreseeable scenario of continued protectionism, our analysis shows that the Emerging Markets, especially China and India, will be the major losers, and that the dent on growth for developed economies is much lesser. The counter-factual loss of exports volume for India and China post the 2008 GFC is estimated at 40-60% (assuming that the pre-crisis robust trade growth was intact).
In our earlier research, published in April 2018 (Persistent trade protectionism to impel inward-looking Indian policies), we had taken a view that protectionism is a part of the ongoing global economic rebalancing between the Emerging Market economies and developed ones, and could last for 3-5 years.
From a financial market perspective, a possible combination of narrowing global excess liquidity, engendered by continued normalization of ultra-easy monetary policy of the US and subsequently followed by others, and narrowing trade opportunities for Emerging Market economies can have implications on their financial market conditions, exacerbating volatility and tight liquidity conditions.
In this context, the RBI was much ahead of the game when it started accumulating foreign exchange reserves after the 2013 taper tantrum shock when the Fed initiated its rate lift-off from near-zero levels. This buffer has helped the RBI ward off extreme market volatility. Hence, the recent attempts to strip the RBI off its reserves for using in funding the government’s fiscal spending is fraught with the risk of rising volatility as it would impair the central bank’s credibility in ensuring stable market conditions, impacting domestic growth as well.
The author is Head of Research, Economist & Strategist at Emkay Global Financial Services. Views expressed are his own