Trade And Currencies: A Dangerous Global Situation – OpEd

By Cornelia Meyer*

Let us start on a positive note: US President Donald Trump was rejoicing last Friday when he announced that the EU would increase its imports of non-hormone treated US beef by 46 percent within one year, which is set to increase by 90 percent altogether. This constitutes up to 35,000 tons of the 45,000 EU quota for imported beef. It will be at the expense of other importers, mainly Argentina and Uruguay. Over the past year the EU has also increased its liquefied natural gas (LNG) imports from the US by 370 percent and its soy bean imports by 100 percent.

The EU commissioner responsible for trade, Cecilia Malstroem, was so malleable for a simple reason: The EU fears that Trump might levy import tariffs of 25 percent on European cars to the US, particularly BMW and Mercedes, which constitute a major export market. No wonder that German Economy Minister Peter Altmaier heaped praise on the agreement on beef. However, the EU is not out of the woods yet. The US administration will revisit its trade relationship with the EU in autumn. The president even joked about tariffs on cars when he made the announcement on beef, which probably was a harbinger of things to come.

The agreement with the EU was the only positive news for the week. The president announced a 10 percent tariff on the remaining untaxed $300 billion worth of imports from China. This sent global stock markets in a tailspin and investors woke up to a sea of red on Monday morning: Last week Dow Jones had the second worst week of the year and the MSCI emerging market index fell by 2.5 percent in early Monday trading in an unprecedented 10-day downward spin. The Nikkei also fell by 2.3 per cent on Monday morning.

The Chinese government reacted swiftly by instructing its state-owned enterprises to suspend imports of US agricultural produce. To make matters worse, China’s central bank, the PBOC, seemingly reversed its strong Yuan policy, where it supported its currency against the dollar. On Monday the Yuan passed the psychologically meaningful 7:1 threshold against the dollar for the first time since 2008. Investors fled to the safe havens of the Japanese yen and the Swiss franc. Some observers fear that the trade wars could swap over to currency wars with countries devaluing their currencies to improve their terms of trade in a new “free for all” system of global trade. This will make life difficult for export champions like Japan and Switzerland with their traditionally strong currencies. It will be good for gold though — another safe heaven.

It also increases pressure on the US Federal Reserve to continue lowering its base rate. Last week’s 25 basis points reduction had little effect, because it had already been baked into expectations. Some analysts predict as many as 5 more rate cuts within the next 12 months. The danger is that Trump’s actions may de facto take independent decisions out of the hands of Fed Chairman Jerome Powell. This is suboptimal, because in the long run economies tend to fare better when their central banks are independent. History also suggests that economies with strong currencies outperform those with weaker ones over time. These are two facts that the powers that be in the US, China and the EU, the other major economic bloc, might want to consider.

In the meantime all durations of German government paper have reached a negative yield for the first time in history. The yield curve in Japan is about to invert, which happens when short-term government paper has a higher yield than the 10-year JGB. Inverted yield cures generally signify an (impending) recession.

As for Japan, the land of the rising sun is engaged in a mini trade war with South Korea, which threatens the supply chain for smart phones and other electronic devices. This is but the latest sign that the global order of world trade is unravelling and descending into a series of bilateral and acrimonious tit for tat conflicts.

The global economy has every interest in keeping the multilateral system going, with the World Trade Organization (WTO) at its center. The WTO is clearly in need of reform, but dismantling it if only by action is to nobody’s benefit, because the organization’s arbitration mechanism is badly needed, especially when the going gets tough, as it has been doing for some time.

In the meantime the world economy suffers from these trade shenanigans and can hardly afford for them to be broadened to the world of currencies. The IMF and the World Bank have revised their growth forecasts downward several times since January 2018, citing the negative outlook for trade as the main culprit.

GCC economies particularly depend on an open trading system. It is the backdrop against which the UAE and its emirates, such as Dubai, Abu Dhabi and Fujairah, have risen to economic prominence. The system allowed companies such as DP World to become a major global player, and Saudi Arabia’s Vision 2030 will greatly benefit from access to global markets. Lastly, trade barriers and a localization of supply chains also have a negative effect on the oil price, which would affect most GCC economies. JP Morgan has estimated that the latest trade wobbles might shave as many as 250,000-500,000 bpd off the global demand for oil — at a time when a tidal wave of non-OPEC production to the tune of 2.1 million bpd is set to hit global oil markets next year, according to the International Energy Agency. You do the maths!

All in all the global economy would benefit greatly from more predictability and stability as far as trade and currencies are concerned. There is a lot at stake; namely many jobs throughout the globe in developed and developing countries alike. Furthermore a lot of wealth and prosperity, which has been hard fought for over decades, can be destroyed so easily. Scary!

• Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources