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What effect could the ongoing trade skirmishes have on the global economy in 2020? Tanya Ott sits down with Deloitte Global economist Ira Kalish to consider the possibilities.
“ There is a risk that this trade war—and not the US-EU trade war but the overall environment of global trade wars—could push the global economy into recession. ”
—Ira Kalish, Deloitte’s chief global economist
Tanya Ott: Welcome to 2020—a year that could get pretty darn interesting.
I’m Tanya Ott and today we’re kicking off a new segment on the Press Room …
Ira: Hi, I’m Ira Kalish. I’m the chief global economist for Deloitte.
Tanya: This is a big week—a really big week—for the makers and sellers of consumer technologies. More than 100,000 people from all over the world have converged in Las Vegas for the Consumer Electronics Show. There are 4,500 exhibitors and more than 250 conference sessions spread across 11 venues with a total of more than 2.9 million square feet1 to display the latest in robotics and artificial intelligence, high-end audio and wireless devices, smart homes, smart cities, self-driving cars, fitness, drones, e-sports, computers—you name it and it’s probably there.
What’s most definitely going down at the show is a lot of speculation about the global economy. Two of the world’s largest national economies—China and the US—have been locked in a trade dispute for the last two years. There’s been a lot of back and forth over that time, so I asked Ira to remind us …
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Tanya Ott: Remind us, what were the most significant moves made on each side?
Ira Kalish: Ok. In my opinion, there has really been a sea change in US trade policy. Up until about two years ago, the US had among the lowest tariffs of major industrial economies. Today, it has the highest tariffs, even higher than [what] we see in some major emerging countries. These are the highest tariffs the US has had since the 1930s. It’s mainly a change in US policy. There have been measures taken by China. And, of course, the US has also imposed tariffs on some other countries as well.
Tariffs are essentially a tax, and they’re a tax paid by the consumers and businesses of the country that imposes those tariffs. And so, we’re going to see significant increases in consumer prices and the costs that businesses face, but we haven’t seen a lot of that yet because it takes time for the tariffs to work their way through the supply chain.
What we have seen, though, is an impact on the global economy because of the uncertainty engendered by this trade dispute. It has led many businesses to put large projects on hold. And as a consequence, it has had a chilling effect on business investment, not just in the US but also in China and even in Europe.
Tanya: You mentioned how there are going to be higher prices for consumers coming down the road. We haven’t seen that yet, but what we have seen are some of the impacts on farmers and manufacturers here in the United States, in particular. What have we seen there?
Ira: In response to some of the US tariffs, China has imposed tariffs on the US, particularly targeting agricultural products as well as other products. And this has had a big negative impact on the US farm sector. Some Chinese purchasers have diverted their trade away from the US to places like Brazil and Argentina. And US farmers are concerned that even when the tariffs come down, they may have actually permanently lost some of the markets that have been very important to them. So, this is a big issue for [some farmers and manufacturers], certainly.
Tanya: It sounds like what you’re saying is that we’ve seen some impact already, but you believe it’s going to be even more in 2020. What are you anticipating for this year?
Ira: It depends on what happens in terms of policy. And again, there’s quite a bit of uncertainty about that. But what we do know is this—until May of 2019, most of the tariffs on China were only 10 percent and the value of the Chinese currency had depreciated by about 10 percent, so effectively it was a wash. But starting in May, some of the tariffs went up to 25 percent and they may go higher and that will have a significant impact on prices. We haven’t seen that yet because, again, it does take time for that to work its way through the pipeline, but my expectation is that in 2020, barring some significant trade agreement between the US and China, we’ll probably see significant increases in some consumer prices. Also, it’s worth noting that about 40 percent of US imports from China are components used by manufacturers. And as those costs go up, those manufacturers may lose some of their global competitiveness and that, should it occur, will have a negative impact on their profitability and their ability to sell in global markets.
Tanya: We’ve been framing this much from the US perspective. But what is happening in China with their economy in relation to this trade dispute?
Ira: The trade dispute has certainly had a negative impact on the Chinese economy, although it’s hard to identify what part of the slowdown in China is due to that and what part is due to other factors that were already taking place. China has seen a decline in its working-age population, so all other things being equal, that leads to slower economic growth. They went through a period of excessive investment a decade ago and that yielded excess capacity, which has had a negative impact on their business investment.
But I believe the trade war has also contributed to the economic slowdown. [To some extent] it’s certainly hurt overall trade. Exports to the United States have fallen sharply, although exports to the rest of the world have increased. And so, the Chinese economy has slowed, and the Chinese government has responded by undertaking some fiscal and monetary stimulus measures to try to halt the slowdown, although it’s only been moderately successful.
Going forward, I expect in 2020 even slower economic growth in China than took place in 2019. And the Chinese government is going to focus not simply on dealing with the trade war with the US, but trying to find other sources of growth. China has been attempting to liberalize trade with other countries even as it imposes tariffs on the US, and China has continued to try to stimulate domestic demand in order to move the economy away from excess dependence on exports.
Tanya: Talk a little bit about the liberalization of trade policies with other countries. Who is China looking at? What are their biggest options on that front?
Ira: There are a couple of areas. One is China has organized a free trade agreement among Pacific Rim nations called the RCP or Regional Comprehensive Economic Partnership. Over time, that is going to come into effect and that will involve a reduction in trade barriers between China, Japan, Southeast Asia, and potentially India if they decide to join, which they haven’t so far. And China has also looked to liberalize trade with Western Europe, especially the European Union. China has actually cut tariffs on countries other than the United States, even as it’s increased tariffs on the US. So China sees trade as an important source of growth for their economy, but given that you’re dealing with a country with 1.4 billion people, it’s a huge domestic market and they're looking to boost domestic demand, especially consumer demand after a prolonged period in which their economy has been highly dependent on exports and business investment.
Tanya: You mentioned the European Union. I want to circle back round on that because the US and the EU have some burgeoning disputes as well. Update us on that one.
Ira: There are a number of areas of conflict. One is that the World Trade Organization made a ruling about trade in aerospace products and actually gave both sides the ability to impose punitive tariffs in retaliation for subsidies on aerospace products. And the US has taken that to heart and imposed some tariffs. The US has been angry at France for a digital services tax and has threatened very substantial tariffs. And the US has also threatened, on the basis of national security concerns, to impose tariffs on all automotive imports, but basically, it would primarily be focused on German automotive imports. And that actually has had a chilling effect on investment in the German automotive sector, because there is uncertainty about what kind of trading environment those companies are going to face going forward.
So, in my opinion, there is tension at the very least between the US and Europe. It hasn’t yet resulted in huge tariffs like in the case of China, but it has created [some] degree of uncertainty which has had a negative impact on business investment on both sides of the Atlantic.
Tanya: Do we have anything historical that we can look back on and say, well, we’ve been close to this kind of situation with our European allies, or is this something we haven’t really weathered before?
Ira: This is unique in the postwar era. You may recall that at the time of the Great Depression in the early 1930s, the US Congress did pass the famous Smoot-Hawley Tariff, which dramatically increased US tariffs on imports, primarily from Europe. And although it didn’t cause the Great Depression, it substantially exacerbated the Great Depression. And it did lead to substantial retaliation by other countries. In the post–World War II era, we’ve mostly seen a period of trade liberalization led by the United States, which created most of the global institutions that promoted liberalization of the movement of goods and capital and people around the world. So, what’s taking place now is a very substantial change from what’s generally been the case over the last 70 years.
Tanya: What do you anticipate if this escalates more between the United States and the EU? What happens in the US and what happens in the European economy?
Ira: Personally, I think it could be quite negative. When you impose restrictions on trade, it increases costs and increases prices. It reduces consumer spending power. It slows economic growth, and it has the effect of stymying business investment. And even though we haven’t seen a huge degree of restrictions on trade across the Atlantic, the uncertainty appears to already be having a negative impact. So, if this trade war worsens, it could have a further negative impact on both economies. The eurozone economy has already just skirted recession, and specially Germany, where the economy is slowed down to a crawl. And in large part, that was due to this trade war. The US economy has also slowed down in large part due to the trade war, although the US economy continues to grow at a reasonably good pace. Both economies have seen a sort of bifurcation where exports and investment have slowed or declined, while consumer spending has continued to grow at a reasonably good pace. And the question now is whether the weakness in investment and exports will spill over into the consumer sector or, to put it another way, whether the weakness in industry will spill over into services. There is already some evidence that this is happening, not enough yet to push either side into recession. But there is a risk that this trade war—and not the US-EU trade ware but the overall environment of global trade wars—could push the global economy into recession.
Tanya: We have this sort of global environment of trade war, but every time that a move is made and someone’s hurt, someone else benefits. Even if it’s a smaller country, who's benefiting from what’s happening between the US and China or the US and the EU countries?
Ira: In the case of the US-China trade war, some companies that assemble final goods in China have chosen to divert that assembly to other countries in Southeast Asia, primarily Vietnam. And so, we’ve seen very strong growth of the Vietnamese economy and strong inbound investment into Vietnam as a consequence of the trade war. Interestingly, though, the US has threatened to impose tariffs on Vietnamese goods as well. There was for a while a view that Mexico would benefit from the US-China trade war because Mexico’s wages are very competitive and Mexican goods have free access to the US through NAFTA. But at one point earlier in 2019, the US threatened tariffs on Mexico, and that had a negative impact on the willingness of businesses to shift their supply chains from China to Mexico.
Tanya: Mexico, Vietnam, any others?
Ira: Not really. What we’ve seen is the trade war reverberate to other countries. So, if you look at Asia, for example, China is at the center of a network of supply chains where many components are made in countries in Southeast Asia or Taiwan, South Korea, [or] Japan, and then exported to China for final assembly and then goods are exported from there to the US or Europe or elsewhere. Because of the uncertainty about trade, because of this disruption of supply chains, we’ve seen negative consequences for many of those other economies in East Asia. Some are handling it better than others, but on balance, it’s been a negative for most of them. And then if you look at other emerging countries around the world, particularly those that sell commodity products to China, Chinese imports of those products have slowed down as a consequence of the trade war and it has hurt those countries. But again, there are some winners; as I mentioned earlier, because of the Chinese tariffs on US foreign products there’s been a diversion of trade to South America. So, to some extent, Brazil and Argentina have benefited from that. But on balance, if the global economy slows overall because of the trade war, I believe those countries will suffer as well.
Tanya: Take out your crystal ball 2020. What are the big thoughts you want to leave us with for what we should be looking for this year?
Ira: There are a couple of unanswered questions. One question is, will the trade war get worse, will it remain the same, or will there be an easing of the trade war? My expectation is that it will mainly remain the same and mainly continue to have some negative consequences to the global economy. Another big question is, will there be some fiscal stimulus in Europe to offset the weakness of the European economy? And I don’t know the answer to that, but Europe overall has slowed down substantially, in part due to the trade war. The European Central Bank has eased monetary policy, but by its own admission, that might not be sufficient. And many analysts have called for fiscal stimulus on the part of those countries that have fiscal space like Germany or the Netherlands. But it’s not clear if that will happen.
And in the US, one of the big questions is how the Federal Reserve will act in the face of headwinds from the trade wars and still low inflation, but an extraordinarily tight labor market that has the potential to cause an acceleration of wages that would be inflationary. So, the Fed has the choice to leave monetary policy unchanged, ease policy, or even tighten policy depending on what happens. These are some of the factors that are likely to drive where we go in 2020.
Tanya: Okay. Ira Kalish, thank you so much. Ira Kalish is Deloitte’s chief global economist.
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