Big shocks fomenting from escalating trade fights

“This (further US tariffs on Chinese goods) is damaging; it presages a situation of trade tensions going from bad to worse, and casts doubts on whether a trade deal can be reached before the US presidential election, ” said Lee Heng Guie(pic), executive director, Socio Economic Research Centre.

FEELINGS of bitterness, resentment and mistrust engendered by intensifying trade wars involving more nations now, are set to further damage global harmony.

Disruption in economic growth follows as trade war agendas unravel, damaging companies and displacing the workforce.

New opportunities may arise and new jobs created as a result of these disruptions, but the markets may not be there, as global growth slows and future investments remain flat.

Are we in for some big shocks as powerful nations challenge each other through tariffs and non-trade barriers?

President Donald Trump, frustrated by China’s slow actions in purchasing a huge amount of US agricultural produce, tweeted suddenly that an initial 10% tariff, which can go up to 25% in stages, will be imposed on the remaining US$300bil of Chinese imports.

On top of the new tariffs on Sept 1, there is an existing 25% tax on US$250bil of Chinese imports.

Japan has imposed export sanctions on South Korea in its export list of countries with preferred trade relations, purportedly over some historical disputes.

All involved say these will not affect their relationships in other areas, but current and threatened retaliatory moves speak of anger and rebellion.

The ravages of war is evident everywhere; growth in global trade has stalled and business investment is not carried on due to uncertainty over trade.

Global Purchasing Managers’ Index (PMI), which measures the health of the manufacturing sector, is at the lowest since October 2012, with 19 out of 30 countries reporting a downturn in manufacturing, said IHS Markit.

Countries in manufacturing decline now include China, Japan, Germany, Britain, Italy, Brazil, Russia, Taiwan, South Korea and Mexico.

Also spooked by Brexit fears, factory output in Britain fell to a seven-year low, the IHS Markit/Cips manufacturing PMI remained flat at 48.0 in July.

A reading of below 50 points to a decline in manufacturing.

In Germany, Markit’s flash composite PMI, which tracks manufacturing and services, fell to 51.4 in July from 52.6 in June.

Factory activity in China, measured by the Caixin/Markit factory PMI, was slightly higher at 49.9 in July from 49.4 in June but headwinds remain with a renewed year-on-year slowdown.

Malaysia’s Nikkei manufacturing PMI dropped to 47.6 in July, from 47.8 a month earlier.

IHS Markit’s manufacturing PMI for South Korea registered the third straight month of decline, dropping to 47.3 in July from 47.5 in June.

Singapore, among the worst hit in the region, saw its PMI dip to 49.8 last month, the third straight month of decline.

Although that was higher by 0.2 in June, the outlook for Singapore’s manufacturing sector remains bleak.

In Taiwan, manufacturing PMI fell 0.1 from June to 48.8, said the Chung-Hua Institution for Economic Research, a leading think-tank.

“This (further US tariffs on Chinese goods) is damaging; it presages a situation of trade tensions going from bad to worse, and casts doubts on whether a trade deal can be reached before the US presidential election, ” said Lee Heng Guie, executive director, Socio Economic Research Centre.

With global growth under further threat, central banks will be under pressure to cut interest rates to pump in more liquidity.

The Federal Reserve’s arsenal for aggressive rate cuts which could be required in the event of big economic and financial shocks, is limited; the US federal funds rate stands at only 2.25%.

Further cuts are in question: the Fed’s recent decision to cut rates by 25 basis points to 2.00%-2.25%, was not unanimous.

AmBank Research is looking at two more rate cuts by the Fed this year, despite Fed chairman Jerome Powell’s statement that the recent cut was a “mid-cycle adjustment.”

Are we really into just a mid-cycle slowdown? The Cass Freight Index, a measure of North American freight volumes and expenditures, for June this year has fallen below the level in June of 2014.

The sharp uptick in The Conference Board consumer present situation (170.9 in July against 164.3 in June) and expectations (112.2 in July versus 97.6 in June) indexes usually point to what is seen as recession ahead.

Actually, problems with tariffs cannot be addressed by monetary policy.

“Tariffs do not advance the objective of improving the productive efficiency of US industries which have simply raised prices, in tandem with the rise in prices of Chinese imports, and earned super normal profits, ” said Pong Teng Siew, head of research, Inter-Pacific Securities.

The cost of living just increases without much difference to consumer choice, while imports from China may remain competitively priced as goods sourced elsewhere also saw price increases.

In the end, it is a lose-lose situation.

Columnist Yap Leng Kuen reckons there could be better short cuts to problem solving than trade fights. The views expressed here are solely that of the writer.