By Stephen Pope
Free trade is an economic policy that does not discriminate against imports from and exports to overseas nations. It allows both buyers and sellers from different economies to voluntarily trade with one another to exchange goods and services free from restriction. In short, the domestic government refrains from applying tariffs, quotas, subsidies or prohibitions on goods and services.
So it is rather chastening to hear the International Monetary Fund warn that sluggish economic growth throughout the world could lend support to an anti-trade backlash; a phenomenon that has become a more frequently mentioned feature of the political narrative in both the US and Europe.
The IMF issued its warning in the October 2016 World Economic Report at the fund’s semi-annual meeting. It forecast global growth to be 3.1% this year, rising to 3.4% in 2017.
Maurice Obstfeld, IMF chief economist said:
“...It is vitally important to defend the prospects for increasing trade integration, ...Turning back the clock on trade can only deepen and prolong the world economy’s current doldrums. ...”
Such an observation can find support from another supranational organisation, The World Trade Organisation.
Director-general Roberto Azevêdo said in April this year:
“...Trade growth has been disappointing in recent years, due largely to prolonged sluggish growth in GDP following the financial crisis. Looking forward we expect trade to continue its slow recovery but with economic growth still fragile and continued geopolitical tensions, this trend could easily be undermined. ...”
That prospect looks all too real in the following chart and the correlation of global trade growth and global GDP growth stands at 0.69.
IMF outlook and big themes
The IMF host a semi-annual gathering of government officials, central bankers and financiers for a week of official and unofficial meetings in which they ponder the state of the global economy. It is almost like a Q4 version of January’s World Economic Forum in Davos.
Front and centre on most people’s minds will be the presidential election in the US on November 8; a process that has not been shy of raising an anti-trade and anti-globalisation sentiment throughout the campaign and debate.
Similarly, in France the presidential election will be contested in April and May next year. There is a very real prospect that the anti-globalisation Front National Party will see its leader Marine Le Pen lead the first round of voting in April. She will most likely lose out in the second round, i.e. the run-off in May.
However, a most significant impact on global trade may stem from China as the 19th National Congress of the Communist Party of China will be held in Beijing, China in the autumn of 2017.
This congress will be closely watched due to a far-reaching change in the makeup of the top leadership of the Communist Party. A majority of the Politburo Standing Committee is expected to retire at this congress. This may be a time when China focuses on internal political positioning as against embracing the wider world.
Developed world stalling
The IMF outlook for growth in developed economies is worryingly lacklustre as it forecasts just a 1.6% expansion in 2016 cf. 2.1% last year.
Of major concern is the declining sense of optimism surrounding the US economy. In July the IMF saw GDP growth in the world’s largest economy at 2.2%, however, that has since been slashed to just 1.6%. No wonder the Federal Reserve is spending a great deal of time pondering the timing of the next increase in Fed Funds.
There is a growing level of anxiety that for all the aggressive waves of monetary accommodation and asset purchase schemes, the major central banks have not been able to shift the needle very much when it comes to economic growth. The only growth that one can clearly point to is the growth in the value of financial assets.
He's most definitely one for looking inward rather than outward. Photo: iStock
Emerging nations will improve but lack locomotive power
Once again the engine of growth, on the global scale is coming from the emerging economies. They are forecast by the IMF to grow at 4.1%
Emerging markets may grow, but when one factors in the low starting level of their nominal GDP ( ex-China), in the global context they as a collective group will not be able to pull the global economy out of its trough.
Russia has been dogged by the low oil price since June 2014 and Brazil, despite the potential boost of the FIFA World Cup in 2014 and the Summer Olympics of 2016 in Rio has suffered several setbacks from the ongoing political scandals at the very top of the political structure.
The IMF cut the outlook for Turkey’s economy after the failed coup attempt in July whilst the forecast for South Africa, whose debt is on the cusp of the “Junk/Investment Grade” event horizon is being squeezed by falling commodity demand from China, weak commodity prices overall and political turmoil.
The GDP growth of China is expected to slow from 6.6% this year to 6.2% in 2017. This sounds good, but it is barely sufficient to make good on the pledge of jobs for all. I have already mentioned the party congress next year, but to appease the masses watch for credit injections into an economy even though it already has an excess of industrial capacity and dangerously high debt levels. In that regard it will be no surprise if China keeps dumping goods such as steel, textiles, toys and tyres on the external market at prices beneath those charged at home.
India remains the brightest spot in the global economy, running at 7.6% this year and next as the country has benefited from falling commodity prices and a deeper decline in inflation than was expected at the start of the year. However, the ages old question of overcoming the caste system will continue to be a major problem for the Indian political classes.
China has much to do to appease its masses where industrial
overcapacity is continuing to cause well-documented issues. Photo: iStock
No time for being anti-trade
The managing director of the IMF, Christine Lagarde, has sounded a stark warning that this is no time for global leaders to be beating a drum of anti-trade rhetoric. She took aim at the campaign of Donald Trump by calling policies that discouraged trade liberalisation “...economic malpractice...”
He has attacked the Democratic Party nominee, Hillary Clinton, for her support of the North American Free Trade Agreement, saying it cost the auto industry more than 100,000 jobs, and predicted that if she’s elected, she will approve the Trans Pacific Partnership, which he said would be
“...an even bigger disaster for the auto industry. ...”
Sadly, Trump sees and says things in a highly selective manner. He has failed to take notice that Detroit, which exited bankruptcy in December 2014, is on the upswing and that the domestic auto industry had, in 2015 its best year in history. (Warning...too much of that has been built on excessive auto loans).
Trump insisted he is not anti-trade.
“...Trade has big benefits, and I am in favour of trade. But I want great trade deals for our country that create more jobs and higher wages for American workers. Isolation is not an option, only great and well-crafted trade deals are. ...”
What is missing is investment
I sense that trade is a force for good as it exposes poor industries to competition. Raise your game or shut down, shape up or ship out. These are the mantra I prefer. What is at fault is the reluctance by companies to invest significant sums into new plant and equipment.
This is not an excuse for greater levels of government intervention...oh no. What is at fault is the failure of governments to create the conditions for confidence to flourish and for investment to make sense. New enterprise zones, tax holidays, using fiscal policy via supply side measures...not massive new debt and wasteful spending.
That approach with trade reciprocity between nations that exploit comparative advantages is key. This matched with a hard line on those that dump goods is the way ahead. If that means the WTO being tough on China, or other dumpsters, then so be it.
-- Edited by Martin O'Rourke