It was meant to be the year of the trade war. Instead, it was the year of the trade boom.
As 2017 draws to a close, the International Monetary Fund is projecting the volume of trade in goods and services will have climbed 4.2% over the year, up from 2.4% in 2016. That would be the first time trade has outpaced output growth since 2014 and harks back to the pre-crisis days when such outperformance was a regular occurrence.
Among the winners: big manufacturing powerhouses such as Germany and China and producers of electronics like South Korea, which recently raised its benchmark interest rate for the first time since 2011 after months of surging exports. Caterpillar Inc. and Samsung Electronics Co. are some of the companies that are cashing in.
Closely watched gauges on manufacturing suggest the recovery should continue into 2018. A weighted average of flash Purchasing Managers Indexes for China’s major trade partners came in at 56.3 in November — the highest since February 2011, according to Bloomberg Economics. China’s official manufacturing PMI unexpectedly climbed to 51.8 in November.
“A trade boom, rather than a trade war, has been the big theme,” said Chua Hak Bin, a Singapore-based senior economist with Maybank Kim Eng Research.
That doesn’t mean the threat of protectionism has passed. President Donald Trump is still vowing to crack down on countries the U.S. believes don’t trade fairly, and negotiate deals more favorable to America. While the White House is focused on pushing through tax cuts, there are still signs Trump plans to get tough on trade.
The U.S. Commerce Department took the unusual move of evoking powers it hasn’t used in more than a quarter century to begin a probe into Chinese aluminum imports that could lead to tariffs. This week, the U.S. joined the European Union in rejecting China’s claim that under the terms of its accession to the WTO it should have graduated last year to market-economy status, which would offer greater protection from anti-dumping duties.
The U.S. move “is a cautionary and potentially significant marker in the U.S. crusade against what are deemed unfair trade practices,” said Patrick Bennett, a Hong Kong-based strategist at Canadian Imperial Bank of Commerce. “The issue of trade protectionism has potential to continue looming large for financial markets.”
The U.S. has taken other steps to tighten trade enforcement and more is expected in 2018 as investigations into Chinese intellectual property practices and other areas continue. The U.S. has proposed changes to the North American Free Trade Agreement that have been rejected by Mexico and Canada, raising the risk that Trump will follow through on his threat to pull out of the deal. The U.S. also wants to revamp its trade deal with South Korea.
“There is a sense that this administration regards with suspicion” multilateral organizations such as the World Trade Organization, said Carlos Gutierrez, who was U.S. Commerce secretary under George W. Bush. He’s now chairman of the National Foreign Trade Council in Washington. He added that Nafta talks “aren’t going anywhere,” a distressing situation for global companies that have built supply chains on the assumption they won’t have to pay tariffs within North America.
Since Trump wants to boost U.S. growth, he will be pleased with the bullish outlook for the world economy. But he also wants to reduce the U.S. trade deficit with the rest of the world — a goal that could slow the recovery in trade if it leads to more barriers.
That contradiction will loom over the world’s trade ministers when they meet next month in Argentina at a high-level gathering of members of the World Trade Organization.
WTO Director-General Roberto Azevedo has warned that the Trump administration’s decision to block appointments to the WTO’s appeals panel is undermining its ability to resolve trade disputes. Trump doesn’t feel the U.S. gets a fair shake at the WTO — an argument other members question, given America’s leading role in creating the trade tribunal and the global rules that underpin it.
“Every country in the world hates the WTO. They just hate all the alternatives worse,” said Rufus Yerxa, president of the National Foreign Trade Council, whose members range from Coca-Cola to Facebook. “That’s really the lesson the U.S. has to draw. It’s easy to hate some system rules. The question is what’s the alternative?”
But while the risks stemming from trade tensions remain, the economic backdrop could hardly be rosier. Goldman Sachs Group Inc. and Barclays Plc forecast global growth will reach 4% next year.
The trade recovery is fueling confidence elsewhere too. A nascent recovery in investment as companies spend more on upgrading and expanding to meet demand creates a second wave of support. Illinois-based Caterpillar, long a pointer for global growth, has seen increased sales in almost every corner of the world: from Asia to Europe, and Africa to Latin America.
And even with a protectionist Trump presidency, trade pacts continue to get inked elsewhere. The Trans Pacific Partnership, dumped by Trump, has been revived by the eleven remaining members who continue to discuss it.
“The global economy appears set to remain in good shape in 2018 as the broad-based economic strength seen this year will carry over,” Oxford Economics wrote in a recent note in which they revised their forecast for world trade higher by 0.5 percentage points to 4.2% next year. “We see some scope for further upward revisions.”
With assistance by Bryce Baschuk