Economic Commentary – July 2019

July 9th, 2019, by Chris Davis

Starting All Over Again

In Osaka, Japan the G20 (an international forum of government leaders, central banks and international organisations, accounting for at least 75% of world trade) met at the end of June to discuss amongst other things the major economic challenges. Shinzo Abe, the Japanese prime minister and G20 president for this year, had set an ambitious agenda of free and fair trade, taxation of the digital economy and how to tackle the global environmental challenge. The result of the talks was a warning that trade and geopolitical tension had increased and risks to the global economy “remain tilted to the downside”. There was a bland statement on cooperation for a globally fair, sustainable and modern international tax system and only 19 countries signed up to the Paris Agreement on climate change, with the US rejecting the deal.

Since last year’s G20, there had been increased concern then optimism that the trade dispute between the two largest economies in the world would be resolved. However the breakdown in talks in May this year caught many by surprise. The US chose to increase tariffs on $200bn of Chinese products and placed Huawei, the Chinese tech champion, under effective blacklisting. China in retaliation, increased tariffs on $60bn of US product and started purchasing agricultural products from other areas of the globe.

Global markets welcomed the G20 meeting of Presidents Donald Trump and Xi Jinping concluding that they would re-start negotiations. Although the immediate risk of an all-out trade war has been averted, they are in effect back to square one. The fundamental issues remain to be resolved, namely that there is a trade imbalance between the two countries, China does and will continue to have a subsidy policy, and the alleged intellectual property theft by China’s companies. As President Trump conveyed the agreement via Twitter he also mentioned “the quality of the transaction is far more important to me than speed. I am in no hurry”. As Donald Trump launched his 2020 presidential campaign this month, perhaps China understands his timeline very well.

A bright spot from the summit was an announcement that the EU and Mercosur (a South American trading bloc) struck a trade deal. It has taken 2 decades to achieve. As the Financial Times notes, there is still caution as “the agreement still needs to be ratified by the national parliaments of all member countries of both blocs, as well as by the European Parliament and EU Council”. A huge victory for the South American agribusiness sector; EU farmers, unsurprisingly, have not welcomed the deal. French President Macron might have some angry farmers on the roads this summer.

With the US-China negotiations continuing and the dispute with Mexico resolved after some rapid diplomacy and Mexican promises, Europe is next on the US president’s agenda. Mario Draghi, the retiring European Central Bank (ECB) president has been accused of conducting a currency war by President Trump. In Mr Draghi’s latest speech he outlined how the ECB could launch a new round of easing measures if the inflation outlook didn’t improve. In response the US Trade Representative’s office released a list of additional products that could be hit with further tariffs if the long running dispute over aircraft subsidies given to Boeing and European rival Airbus, is not resolved. The new list of additional products includes olives, Italian cheese and Scotch whisky, with the threat to increase tariffs on auto imports remaining.

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