The world’s two largest economies, the US and China, have been locked in a bitter trade battle. The dispute has seen the two impose tariffs on hundreds of billions of dollars’ worth of one another’s goods. US President Donald Trump has long accused China of unfair trading practices and intellectual property theft.
In China, there is a perception that America is trying to curb its rise as a global economic superpower. In light of this, The Sunday Mail’s Kudzanai Sharara (KS) spoke with the IMF representative in Zimbabwe, Patrick Imam (PI), to discuss, among other things, the impact of trade disputes between the two superpowers as well as his views on the coronavirus ravaging China and also threatening other nations. The following are excerpts of the discussion.
KS: What has been the impact of trade disputes between the US, China and Europe so far on the global economy?
PI: Look, it is clear that trade and investment restrictions pose significant risks to the global economy. Just look at the latest trade numbers. Global goods trade was flat in the first half of 2019 and turned negative from the third quarter onwards. With demand contracting almost everywhere, no country or economic grouping has been spared from the slowdown on the exports side. Most official data and trade-finance transactions continue to confirm weaknesses.
This outcome is not unexpected, as higher uncertainty adds to economic costs, such as through distorting established global value chains. The disruption will therefore have a pronounced impact for developing economies that are part of global value chains, especially in the short run. Firms in those countries would not be able to immediately substitute between imported intermediate inputs as the prices on these inputs increase because of tariffs. Trade also boosts the transfer of knowledge and technology across countries, and therefore leads to higher growth, employment and productivity, especially in developing countries. So less trade will lead to less knowledge and technology transfer to developing countries.
Now, I think it is fair to say that the trade conflict has thus far largely failed to elicit the desired policy reforms. Instead, trade restrictions and policy uncertainty are weighing increasingly on global activity, and conflict is spilling over to currency, technology, and security issues.
KS: How did these tensions arise? What should be done to resolve the trade tensions?
PI: It’s important to bear in mind that the trade disputes did not arise overnight. And it is important to put the current trade tensions into their historical context. The conclusion of the Uruguay Round and creation of the WTO in 1995 were major successes, but since then, progress has not kept pace. Many problems are rooted in the inability of governments to address old issues such as agricultural subsidies and high tariffs for some products as well as a failure to make progress on new emerging issues such as services and e-commerce, for instance.
Therefore, how ongoing tensions are resolved will shape global trade for years to come, whether positively or negatively. For a solution to current tensions to be durable, it needs to be backed by a stable and rules-based trading system, which means getting back to the business of global trade agreements and WTO reform. Cooperative and market-based solutions backed by stronger multilateral rules are more likely to succeed and endure, while managed trade solutions among major players, such as those in the recently agreed China-U.S. Phase 1, are more likely fragment global trade and investment and, with it, perhaps, the broader international economic system.
KS: How can the international community ensure that trade imbalances do not serve as a catalyst for future political turmoil and rising protectionism? What should individual countries do?
PI: This is a very pertinent question. I would argue that as a general principle, governments need to steer clear of protectionism in all its forms. History shows that import restrictions hurt everyone, especially poorer consumers.
We need to be mindful of what happened in the 1930s, when the forces of protectionism and competitive currency devaluation led to economic disaster for the world. Not only does protectionism lead to more expensive products and more limited choices, but it also prevents trade from playing its essential role in boosting productivity and spreading new technologies. As a result, even protected industries eventually suffer as they become less dynamic than their foreign competitors. One major issue is that discussions about trade restrictions are often bound up with the concept of trade deficits and surpluses. Some people wrongly argue that these imbalances indicate distortionary trade practices.
Yes, it is true that there are distortionary practices, which should be eliminated, and which can leave their mark on trade balances between two countries. But, in general, these bilateral imbalances are a snapshot of the division of labour across economies, including global value chains. For example, a country that focuses on assembling smartphones will tend to have bilateral trade deficits with countries that produce the components, and surpluses with countries that buy the finished devices.
Therefore, unfair trade practices have little impact on a country’s overall trade deficit with the rest of the world. That imbalance is driven by the fact that a country spends more than its income. The best way to address these macroeconomic imbalances is not to impose tariffs, but to use policies that affect the economy as a whole, such as fiscal tools or structural reforms.
The United States, for example, could help tackle excessive global imbalances by curbing gradually its public spending and by increasing tax revenues. This should help reduce its fiscal deficits, and its current account deficit. Germany, which admittedly is facing an ageing population, could use its excess savings to boost its growth potential, including through investments in physical and digital infrastructure, which would help reduce its current account surplus.
Generally speaking, to improve the trade system each country should look at its own practices and commit to building a more open, more stable, and more transparent rules-based trading system. It’s important to remember that the multilateral trading system has transformed our world over the past generation.
It has reduced the cost of living and has created millions of new jobs with higher wages. It has helped reduce by half the proportion of the global population living in extreme poverty. In advanced economies, trade has reduced the cost of living for a typical high-income family by a quarter and it has reduced that cost for a typical low-income family by two-thirds.
KS: How resilient are multilateral institutions of global trade governance? Which reforms are needed to address the widespread grievances regarding the multilateral trading system, in particular the WTO and its dispute settlement mechanism?
PI: I’m glad that you mention the WTO’s dispute settlement mechanism. Having a strong and effective dispute mechanism in the WTO has brought greater transparency and stability to global trade relations and going forward it is important to sustain that. The details are clearly for WTO members to address, but one must hope that they will resolve the matter promptly. The sense of urgency that we’re now seeing around the idea of WTO reform is welcome.
As I already mentioned, the system of trade rules established after World War II generated unprecedented growth in the global economy and helped lift hundreds of millions of people from poverty. But now it needs to be updated.
And this means we should fix the system, not throw it out. So concretely, we need collective action to maintain the effective dispute settlement and to comprehensively modernise the WTO’s negotiation and transparency functions. And here, three key themes are emerging.
First, it is important to strengthen trade policy monitoring and to encourage greater transparency. This means strengthening existing WTO rules on industrial and agricultural subsidies for instance and ensuring that they cover an appropriately broad range of entities, such as state-owned enterprises. Strengthening WTO rules as they apply to technology transfer practices and the enforcement of intellectual property rights is also important.
Second, it’s crucial to maintain the effective dispute settlement and resolve the impasse at the Appellate Body. This is particularly urgent. Without a strong dispute settlement system, there will be little incentive to reform other areas of the WTO, and the risk is that we would be moving towards the law of the jungle rather than having a system that relies on the rule of law.
And third, modernising the system through new market-opening agreements is crucial. This means advancing negotiations in emerging areas where WTO rules have lagged, like e-commerce and investment facilitation. Progress in these emerging areas would go far in demonstrating that the multilateral trading system can still deliver new market-opening. The announcement last year by a group of 76 countries to begin WTO negotiations on e-commerce attests to the great promise of using new modalities.
KS: What will be the coronavirus impact on global growth?
PI: It is too early to quantify the economic impact it might have on China and the world. Much will depend on how the situation can be contained. In the region at the heart of the outbreak in Hubei Province, economic activity has slowed considerably. Hubei Province represents about 5 percent of China’s GDP. There has already been a short-term negative impact on tourism and manufacturing. If the virus retreats quickly though, the economic impact will likely be small. This would be a similar pattern to the SARS episode of two decades ago, where most experts agree that annual growth took a relatively small hit at that time because it was reversed.
The broader point, though, is that we live in an interconnected world with many uncertainties. We must strengthen policies that build more resilience to shocks. The emphasis for every country going forward should be on prevention, and on reacting very fast should another outbreak happen.