Over the past few weeks, trade spats have shaken global markets. Worldwide, trade conflicts are being borne of political rather than economic woes — is this the new normal?

The Elephant in the Room – A Trigger-Happy America

Two academic studies focused on American politics, conducted by Italian economists, have concluded that American politicians tend to support free trade, unless their re-election is approaching. Then, they become protectionists. The logic goes that during election season, politicians seek to claim the votes of the passionate few whose livelihoods may be negatively affected by freer trade – the many who would benefit tend not to be cognisant of the fact, so appeasing them is not as high a priority.

Ever since Donald Trump has become President, he’s been targeting China as a currency manipulator, and claiming that the United States has consistently been receiving the short end of the stick in its dealings with the Asian giant. His notoriously inflammatory rhetoric has raised questions of whether the Trump administration’s trade policy is sufficiently based in conventional economic wisdom, or instead seeks political popularity.

These are politically polarising times around the globe, and particularly so in America. The world’s largest economy is already preparing for its 2020 election, and the President’s behaviour is consistent with the findings of the aforementioned Italian studies. Over the past months, Trump has sought protectionist policies in his trade relations with India and Turkey, as well as doubled down on the Sino-American trade war.

This begs the question – are trade conflicts becoming increasingly politically-driven? If so, what should the international community’s reaction be?

Lessons From History – South Korea and Japan

To understand how trade becomes politicized, one must first have a look into the history books. The political will that forces protectionism hardly ever appears of a sudden – more often, it is a long time brewing. The story of the trade war that continues to emerge between South Korea and Japan begins decades ago, with the second world war. South Korea’s top court recently ruled that citizens have the right to sue Japanese companies (like Nippon Steel) for using forced Korean labourers during World War II. Japan denies culpability, and in July responded by restricting exports of three chemicals used in semiconductor production – a significant portion of Korea’s economy (however, Japan denies that the Korean court ruling and its trade restriction are linked). 

This was enough to rock the boat. Tensions escalated, and Japan has recently removed South Korea from its “white list” of preferred trading partners. The President of South Korea, Moon Jae-In’s ruling party has declared that Japan’s actions are an “all out declaration of Economic war”.

The South Korea/Japan trade conflict shows that politicized trade is not a modern or sudden phenomenon – the politics that underpin a protectionist logic can take years to boil over. This is seen in the United States as well and can help explain why portions of the American electorate may consider a Sino-American trade war beneficial: decades of manufacturing sector decline leave Americans frustrated, as their work is now less competitive on a global scale. China is an attractive scapegoat.

So although trade wars borne of political strife seem to be on the rise globally (Pakistan has recently suspended trade with India amid the Kashmir dispute), that may not necessarily mean that economic logic is taking a backseat to populist attitudes. We might just be seeing many long-awaited socio-economic chickens coming home to roost. 

Nevertheless, trade conflict between some of the globe’s largest economies undoubtedly merits a response from the rest of the world. Asia has been particularly affected.

Consequences for the Asian Region

With some of Asia’s largest economies – China, Japan, and South Korea – falling deeper and deeper into trade wars, uncertainty rocks the area. A quote from Imran Arshad, a British exporter and winner of the Queen’s Award for Enterprise: International Trade, speaking on Brexit, seems particularly applicable to what many an asian businessperson must be feeling at the moment: “It’s the uncertainty that’s killing everything right now”.

China’s central bank, in response to American escalation, has lowered the band in which it allows its currency to fluctuate, sending the yuan in freefall – past 7 to the American dollar for the first time since 2008. This is undoubtedly to make exports more competitive, effectively “undoing” some American tariffs. Asian markets fell in response, and over the next few days a multitude of countries in China’s economic sphere of influence (such as India, New Zealand, and Thailand) reacted by cutting interest rates in order to stimulate their economies, hoping to undo the damage caused by of one of their largest trading partners being caught in a trade war.

In short, the Asian response to trade uneasiness in the region has been a conventional one – which is perhaps good. That the trade conflicts in question were politically motivated doesn’t necessarily mean they should be responded to any differently. The symptoms of a trade war are recognizable, regardless of its cause.

Conclusion

Some forecast a recession in America. An inversion of the yield curve (which has predicted every recession of the past 50 years, save one) has occurred in both the United States and Britain. Fears of American domestic downturns have also led global central banks to buttress their foreign exchange reserves with gold, rather than USD. Monetary authorities purchased $15.7B of the precious metal in the first half of 2019 – the greatest increase in the past 19 years of available data.

Truth be told, there is no trade conflict imaginable with as much potential to upset global markets as the one that has been raging between the United States and China – the world’s two largest economies – for the past year. That a recession may be on the horizon is, to many, unsurprising. As off-putting as it may be to say, a recession may be the bitter pill that, if swallowed, would remind the global economy of the dangers of putting political expediency before measured action.

Read this full issue of Trade Finance Talks, free

This article was part of TFG’s third issue of Trade Finance Talks: Trade Wars & Tradetech, launched at Sibos 2019. This free issue gets into the detail of trade wars, trade flows and geopolitics, as well as looking at how digitisation and fintech is bridging the trade finance gap. You can read the full edition for free here.

#maketradenotwar