Dr. Rebecca Harding
CEO, Coriolis Technologies
On the face of it, the coming week looks comparatively quiet after the drama of the conclusion, for the time being at least, of US-China trade talks. There is no scheduled formal dialogue between the two countries and while the talks are said to have been ‘constructive’, there is little sign that the two sides are any closer to an agreement. Having backed the talks into a corner at the beginning of last week by tweeting that $200bn of extra tariffs were to be imposed on imports to the US of Chinese goods, President Trump at the end of the week suggested that the process could take time and that there was ‘no rush’.
Markets rose slightly after a turbulent week because the word ‘constructive’ suggests that we will have more trade ‘jaw-jaw’ rather than trade war-war. In the inevitable ‘fog of war’ that surrounds the trade negotiations at the moment, markets are bound to be confused. While the two sides are talking, this is seen as positive. Nevertheless, political rhetoric is being conflated with potential for economic damage globally as investors seek safe havens for their money globally and hold off on long-term capital expenditure until there is more certainty about where all this will end. As a result, the US Dollar will remain strong, thereby putting further pressure on dollar denominated debt in emerging markets such as Turkey and emerging Asia.
Yet the risk from any trade war remains embedded in the rhetoric, not the economics. It is the language that markets are currently responding to, in the absence of any material facts. We are witnessing the unforeseen consequences of political uncertainty which means that investment is perceived as risky, so money flows to safe havens such as the dollar and makes debt that is dollar denominated more difficult to repay. While a country like Turkey could certainly be managing its economic woes more effectively, it is nevertheless the case that its own mismanagement is exacerbated by an unpredictable global environment.
This does not have to be self-fulfilling prophecy. But the lessons of the last two years tell us that the weaponized language of trade has not gone away and, as a result, the global economy has not achieved anywhere near the ‘escape velocity’ that might have been expected as oil prices recovered and trade picked up at the end of 2017.
Why is this happening? The very simple reason is that trade is more important in defining the political narrative now than it has been, arguably in the post-war period. Trade has become a tool to coerce and influence the policies of other countries. The institutions of trade are either being under-mined by economic nationalism and bilateralism, as is the case with the US-China talks on mutual enforcement mechanisms circumventing the WTO, or they are being used as weapons themselves in the pursuit of national security interests, as is the case with US EXIM.
Do not expect this to stop – either in the coming week or at all. The world of trade is changing. As trade becomes digital, and as supply chains become more integrated with digital trade flows, cyber-security and intellectual property, neither the national nor the international institutions of trade are fit for purpose. And as we go through the transition from a world where trade was about container ships and cargo to a world where it is about the the Cloud and data, we can expect the noise from politicians to intensify as the global system recalibrates.
There will be more noise this week, that is for sure. At the end of the week, there may even be a new front opened up because, by next Saturday, President Trump is due to decide on whether or not to impose tariffs on European automotives. As Mike Pompeo is visiting Russia, and as Victor Orban is meeting with Mr. Trump, it is likely that populist, and nationalistic sentiment that increases the weaponized language will be very apparent.
In the end, though, it is businesses that trade and not governments. For many global finance houses and global businesses, the expansion of China’s technological, financial and economic reach is simply support to their own global reach: business as usual with a partner that can support their investment and facilitate their transactions. The isolationism of the US, ironically, may push more of these businesses to price their trade in currencies other than the dollar; integration through the Belt and Road simply accelerates something the inevitable.
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