A ‘phase one’ US-China trade deal will do little to bolster confidence shattered by deglobalisation

US Commerce Secretary Wilbur Ross recently suggested that an initial trade deal will go a long way towards resolving global uncertainty. To the contrary, it will take much more to reverse the effects of deglobalisation accelerated by the Trump administration

Anthony Rowley

Published: 3:00am, 11 Nov 2019

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I asked US Commerce Secretary Wilbur Ross during a telebriefing from Bangkok last week how long it might take for international business confidence and investment to recover from US President Donald Trump’s trade wars even after a “phase one” settlement is reached between the US and China. His response was simplistic and over-optimistic.

“I’m reasonably optimistic,” he said. “We will at least get phase one together, and that will go a long way toward resolving the uncertainty. People were worried this trade spat might go on for years and create uncertainty. If we resolve phase one, that will calm people down because they’ll see that the endpoint is within sight.”

What world does Team Trump inhabit where they can’t see that the consequences of trade wars which they started are only just beginning to emerge, rather than fading? Don’t they know that international trade is imploding and that the globalisation on which post-war prosperity has been built is being reversed?

From the falling imports reported by the Institute of International Finance to the “synchronised economic slowdown” noted by the International Monetary Fund and the United Nations Conference of Trade and Development’s warning that a “lose-lose” trade war is compromising the stability of the global economy and future growth, the message is clear.

So why do Ross and other Trump administration members continue to mouth meaningless platitudes about confidence bouncing back after an initial deal? Only the absurdly euphoric New York Stock Exchange, which is on a trade-deal high – a classic blow-off before collapse – should be irresponsible enough to believe that.

As one senior economist at a Washington multilateral institution told me: “Not many people think that ‘phase one’ can remove uncertainties [over] trade tensions in a meaningful way. The major channel through which trade tension affects the real economy is through uncertainty and confidence rather than direct trade impacts.”

Ross went on the defensive in response to my question in which I suggested that the trade dispute between the US and China had had an adverse impact on business confidence and investment.

“I don’t think it’s correct to blame the slowdown in trade solely on US-China discussions,” he said. “You have a lot of fundamental economic weakness in Europe and a lot of uncertainty arising from Brexit. You also have the turmoil that a number of Latin American countries are in.”

An anti-Brexit protester holds a placard near the houses of Parliament in London on October 28. US Commerce Secretary said the global slowdown in trade is not entirely due to the US’ trade war with China but also to other factors such as uncertainty over Britain’s departure from the European Union. Photo: Bloomberg

This is true but the quickening disintegration of economic globalisation set in motion by the abrupt withdrawal of the US from the Trans-Pacific Partnership, followed now by India’s withdrawal from the Regional Comprehensive Economic Partnership, can be laid at Trump’s door.

He has shown how to walk away from international commitments and take credit for acting unilaterally and selfishly. He wrote the ultimate primer on populism but it is about to come back and haunt him. An UNCTAD study released on November 5 found that “the United States tariffs on China are economically hurting both countries”, even as they divert exports to the benefit of some other countries.

Chinese exporters and US consumers ‘are big losers in trade war’

But it is a paper published recently by Michael Witt, senior affiliate professor of strategy and international business at Insead, that exposes just how much harm the process of “deglobalisation” is doing, and will continue to do.

Globalisation has been on the retreat for more than a decade, Insead, in introducing Witt’s paper, notes. “Since 2008, there has been a slow decline in trade and large drop in foreign direct investment, and the rules and regulations for global business have tightened,” it says. Barring unforeseen changes, “the world is likely to continue on this path”.

An employee works on the production line of a tyre factory under the Tianjin Wanda Tyre Group, which exports its products to countries such as the US and Japan, in Xingtai, Hebei province, in May. As deglobalisation continues, the reach of multinational companies is likely to shrink. Photo: Reuters

There are diverging views on how all this will play out. According to “liberalists”, Witt says, a deglobalised world is likely to be a patchwork of economic linkages, in the shape of bilateral and regional trade agreements. In the extreme, this could result in re-emergence of economic blocs with currency and trade restrictions.

Container shipping facing titanic battle as global trade model shifts

For “realists”, the likely outcome is similar to the cold war where the US will lose its power as a global hegemon but remain strong enough to deny China the mantle. Or, China could emerge as a new global power, with the yuan replacing the US dollar as a reserve currency and Chinese-designed institutions replacing existing ones.

The reach of multinational companies will shrink considerably while the risk and cost of international business will rise sharply. European firms may succumb to US trade demands rather than face the possibility of a Chinese global hegemon. Whichever proves right, deglobalisation will have a significant and expensive impact on multinational operations.

Where is the “win-win” Trump has bragged of in all this?

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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