Dr. Rebecca Harding

CEO Coriolis Technologies

20th January 2020

As the world’s leaders gather in Davos, there is a sigh of geoeconomic relief going around the world. A phase one trade deal between the US and China was struck on January 15 and US and European stock markets had their best week since August as a result. UK businesses meanwhile were given a resound ticking off by the chancellor, Sajid Javid, at the weekend, who essentially said: “Brexit is happening, you’ve had three years to prepare, get used to the fact that regulations will diverge.”

Uncertainty is so last decade. Trade wars are a thing of the past and we can now rest assured that business can invest, and world leaders can go back to the rhetoric of globalisation’s cuddly capitalism: solving the issues of climate change and tackling global inequality. Trade negotiations will become drawn out and technical – the stuff of the business pages rather than making political headlines.

As if.

The phase one trade deal is not all that it seems. It should not be seen as a “truce” or even, arguably, as a trade deal. The majority of tariffs on US$370bn of Chinese goods remain in place so that the US has further leverage should China show signs of not buying the US$200bn of goods it promised. Much of everything else that was in the deal had been on the table for a long time – the agreement to widen access to Chinese markets for US financial services companies, for example. The dispute settlement agreements are limited and bilateral, outside of the World Trade Organization’s reach. The agreements on ontellectual property are weak and their enforecement will be hard.

The deal was more interesting for what it left out rather than what it had in it. There was nothing on the two areas that are the most difficult and the most important to the US: cyber-theft and cyber-threats by Chinese tech businesses, and the state industrial subsidies which are argued to give Chinese businesses an unfair competitive advantage globally because they do not have to compete on price.

So, have these issues been kicked into the long grass? The short answer is no.

Although President Trump and US Trade Representative Robert Lighthizer are saying talks will start straight away, the signing of a Phase two deal in unlikely to take place until after the US election in October. They say they will keep talking but for now, “the best trade deal ever” is enough to make the world’s markets, and more significantly, US voters, think that the issue has gone away.

But we are watching the wrong game. Almost simultaneous to the phase one trade deal, two things happened. The first was an agreement between the US, Japan and the EU to enforce a tighter definition of “unconditionally prohibited subsidies” through the World Trade Organization. These are state industrial subsidies that are unlimited, or support businesses that are insolvent with no rescue plans or that cannot access private money. It also prohibits substantial debt forgiveness. Other WTO member states will have to be brought into alignment, and the US may well have to prevent the reappointment of judges to the WTO appellate body (the dispute resolution mechanism) as a result of this deal, but it is nevertheless clear that the target is China.

The second was perhaps a more worrying signal of the way that trade will develop during the course of 2020. The US Commerce department began moves to more restrictions on the sale of US technology to Chinese companies like Huawei. This holds back the development of 5G in Europe where Huawei dominates. It will also affect Japan and South Korea, because any foreign companies using US technology in their products will be prevented from selling to Chinese companies.

In other words, the force of US trade weaponisation has moved beyond tariffs and reducing trade surpluses to a world where it is part of a bigger strategic game. While we watch with some relief the overt alleviations of tensions between China and the US, the conflict has moved elsewhere. The explicit politics that makes the headlines and moves markets has gone; the more covert actions of national security strategy implementation have kicked in.

Inequality and climate change are critical to the long-term sustainability of trade and the planet. They rightly justify their place at the top of the Davos agenda. But the economic nationalism that is now obvious in trade policy globally provides a darkening backdrop to the event. The leaders may well not realise what is happening – exploiting inattentional blindness, where people are directed towards seeing something that is misleading or not the full picture by something compelling in the foreground, has long been a tool of political messaging. We assume closure because a deal has been done and there is no reason why the world’s business and political leaders would be any different to the rest of us.

This does not mean that it is not happening, just that we have a responsibility to look elsewhere. Don’t look to trade deals for the real trade action any more. 2020 will be just as tense: the fragmentation of the world trade system and the “decoupling” of the US and China will gather pace. It is likely that sanctions rather than tariffs will be the weapon of choice and this will have profound consequences for the flows of trade around the world. While this may be positive for the banks that finance trade in the short term, they will be increasingly embroiled in the front line of this new “virtual” trade war – banks on the ground rather than boots on the ground.

The Coriolis Technologies trade forecast for 2020 is for 3.7% growth in trade values for the year, which is near zero growth in real terms once inflation and currency volatility is taken into account. Trade tensions and inherent uncertainty are the reason for this. They have not gone away.