global trade: trade first! (avoiding an own goal) · 5/16/2017 · the boomerang effect:...

l Global Research l

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2017 https://research.sc.com

Madhur Jha +44 20 7885 6530

[email protected]

Head, Thematic Research

Standard Chartered Bank

Samantha Amerasinghe +44 20 7885 6625

[email protected]

Economist, Thematic Research


Philippe Dauba-Pantanacce +44 20 7885 7277

[email protected]

Senior Economist, Global Geopolitical Strategist


Special Report – Economics

Global trade: Trade first! (Avoiding an own goal)

Highlights

G20 countries dropped their commitment to anti-protectionism in

their March communiqué. We assess the possibility of a 1930s-style

multi-country trade war. We believe it is unlikely given deep trade

and financial integration, flexible exchange rates, and WTO

membership. The pervasiveness of global supply chains also makes

the focus on bilateral trade meaningless.

More creeping US protectionism, however, is on the way. We

consider the implications of this globally. China, Mexico, Germany

and Japan are targets. But global supply-chain integration may have

knock-on impact on countries like Korea and Taiwan. There might

also be winners: the UK, Vietnam and Thailand stand to benefit.

Even the US would likely suffer, as historically, protectionism has

led to job losses and hit the poor hardest. One in five jobs in the US

is supported by trade.

We consider who might replace the US as an engine of import

demand if the US turns more inward-looking. In the short run the

alternatives are limited, threatening to bring weaker global trade.

Over the medium term, Europe faces too many constraints but

China is slowly building on its role as a true mega-trader and could

be the next engine of global trade demand.

https://app.brainshark.com/standardcharter/vu?pi=zIlz5sUrgzGrsSz0

Special Report – Economics: Global trade: Trade first! (Avoiding an own goal)

11 April 2017 2

Contents

Executive summary 3

Infographic 6

How likely is a global trade war? 8

A 1930s-style trade war seems unlikely 9

How will US protectionism affect the US? 20

No trade war, but greater US protectionism 21

How does US protectionism affect the RoW? 25

Winners and losers 26

Who can replace the US as a trade demand engine? 31

Can anyone replace the US in world trade? 32

China – Rising driver of world trade demand 35

Appendix 1 – Country codes 41

References 42

Global Research Team 43


11 April 2017 3

Executive summary We discuss the likelihood of a multi-country 1930s-style global trade war; the

implications of greater US protectionism for the rest of the world; and the likelihood of

another country becoming a global importer, a position that the US has dominated.

US President Trump’s ‘America First’ policy is not unique; protectionism has crept up

since the 2008-09 global financial crisis (GFC) as G20 countries have stealthily

ramped up measures against each other and governments have exhorted citizens to

buy local products. However, Trump’s stance signals a watershed for global trade.

Before the US elections, G20 countries were officially and firmly anti-protectionist.

But President Trump’s ‘America First’ policies led the G20 to drop its anti-

protectionism commitment in its March communiqué. Other countries are likely to

watch the US closely, ready to react, fuelling fears of an all-out global trade war.

We believe that a full-blown global trade war is unlikely, but more US protectionism is

likely and would be a major threat to world trade given the US’ status as the world’s

largest importer (Figure 2). Weak demand has inhibited the global trade recovery

since the GFC. US demand now drives global import demand again, but

protectionism could undermine this progress. Near-term, replacement candidates are

few, and a period of slow trade growth could set in if protectionism escalates and

weakens the likelihood of stronger services trade growth. Over time, however, China

could supplant the US as the main final demand destination. This shift has already

begun and we think new winners will emerge.

We discuss the implications greater US protectionism has for the US and the rest of

the world. While China, Mexico, Germany and Japan are being singled out, many

other countries will likely be affected due to the prevalence of global supply chains.

Trade wars – No return to the 1930s

Markets are worried about another global trade war. We define a global trade war as

an event similar to the one in the 1930s that led to significant trade barriers across

several countries and had disastrous consequences for the global economy. World

trade collapsed to a third of its original value over 1929-33. We do not expect a

repeat, as the world economy is structured differently now. Financial and trade flows

have closely integrated economies, making it harder to punish a partner without

getting hurt in the process. The extreme trade protectionism in the 1930s reflected a

rigid system in which currencies were fixed and price-based adjustment mechanisms

to address imbalances were absent. Floating exchange rates now provide a safety

valve, lessening the need for dramatic steps to restore balance.

Figure 1: Top five global exporters

2015, USD bn, % share (RHS)

Figure 2: Top five global importers

2015, USD bn, % share (RHS)

Source: World Trade Statistical Review 2016, Standard Chartered Research Source: World Trade Statistical Review 2016, Standard Chartered Research

0

2

4

6

8

10

12

14

16

0

500

1,000

1,500

2,000

2,500

China US Germany Japan Netherlands

0

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500

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US China Germany Japan UK

G20 protectionism has been on the

rise but Trump’s stance threatens to

make it more explicit

World economy is structured

differently now compared to

the 1930s


11 April 2017 4

Also, multilateral organisations such as the WTO can help resolve disputes. The

WTO covers c.98% of world trade and WTO membership discourages tit-for-tat trade

wars. Unilaterally leaving the WTO or ignoring its rules would be damaging.

More significantly, the pervasiveness of global supply chains (GSCs) makes the

focus on bilateral trade balances meaningless and protectionism ineffective. It

creates loopholes for targeted countries and hurts countries not intended to be

targets. In fact, integration within GSCs could result in trade losses for the country

imposing protectionist measures.

Implications of rising US protectionism

Though we think a global trade war is unlikely, increased US protectionism remains a

risk given the rhetoric from the Trump administration. Still, limited information on what

is under consideration leads us to expect piecemeal rather than broad measures,

and protectionism would likely hurt the US itself.

The boomerang effect: Protectionism would hurt the US itself

US President Trump champions greater protectionism as a way to lower deficits and

imports, increase domestic production and jobs and reduce income inequality.

However, a country’s trade deficit is just a reflection of the country investing more

than it saves. President Trump’s plans to boost fiscal spending are likely to lead to

higher trade deficits as spending continues to outpace savings. Previous episodes of

protectionism have shown that the US has suffered as a result of its own policies: it

has led to net job losses, saving jobs in the protected sector while losing jobs in other

sectors; rather than reducing imports, it has replaced one supplier with another; and

it has worsened income inequality – poorer people have been hit harder by rising

prices, less choice and implicit taxes on consumption compared to the rich. It is now

increasingly accepted that job losses in manufacturing are the result of technological

change; more aggressive protectionism could fuel more aggressive automation

consequently. And our analysis shows that the US is highly integrated into GSCs,

importing a significant amount of material that has high US value-added content.

Reducing imports would likely hurt US companies.

Figure 3: US President Trump’s tweets and other statements on trade

Source, Various media, Standard Chartered Research

“China is robbing us blind in trade deficits and stealing our

jobs, yet our leaders are

claiming ‘progress’… SAD!”

“China has been

taking out

massive amounts

of money and

wealth from the

US in totally one-

sided trade, but

won’t help with North

Korea. Nice!”

“Mexico has taken advantage of the US for long enough. Massive

trade deficits & little help on the very weak border

must change, NOW!”

“Toyota Motor said it will

build a new plant in Baja,Mexico, to build Corolla cars for

US. NO WAY! Build plant in US

or pay big border tax.”

“I want to put an

Extra ‘F’ in NAFTA

for ‘Free and Fair

Trade’…can do it,

Senator, so important.”

“We allow Japan to sell us

millions of cars with zero

import tax and we can’t make a

trade deal with them – our

country is in big trouble!”

“I believe in f ree trade,

but it must also be

FAIR TRADE. I’m not

going to let our great

companies and workers

be taken advantage of

anymore!”

“The US has a 60 billion

dollar trade def icit with

Mexico. It has been a

one-sided deal f rom the

beginning of NAFTA with

massive numbers… of

jobs and companies lost.

If Mexico is unwilling to

pay for the badly needed

wall, then it would be

better to cancel the

upcoming meeting.”

“The TPP is horrible. It is a deal

that is going to lead to nothing but trouble. It’s a deal that was designed for China to come in, as they always

do, through the back door and totally take advantage of everyone.”

“Did China ask us if

it was OK to devalue

their currency

(making it hard for

our companies to

compete), heavily

tax our products

going into their

country (the US

doesn’t tax them) or

to build a massive

military complex in

the middle of the

South China Sea? I

don’t think so!”

“Buy American & hire American are the

principles at the core of my

agenda, which is: JOBS,

JOBS, JOBS!”

“I have very serious concerns about NAFTA. NAFTA’s been a

catastrophe for our country. It’s been a catastrophe for

our workers and our jobs and our companies. They’re leaving our country. I want

to change it. And maybe redo it.”

US-Canada trade is outstanding, but “we’ll be tweaking it; we’ll be doing certain things that are going to benefit both of our countries.”

– Joint news conference with Canada’s PM Justin Trudeau

WTO membership and the

pervasiveness of GSCs discourage

tit-for-tat trade wars


11 April 2017 5

Winners and losers

President Trump’s rhetoric (Figure 3), including since taking office, suggests that

protectionism is likely to rise, particularly targeting China, Mexico, Germany and Japan.

However, the impact on these countries would differ sharply: China accounts for nearly

half of the US trade deficit, but as trade is of relatively low importance to its economy,

the impact is comparable to that for Mexico (accounts for 10% of the US deficit).

The prevalence of GSCs also means that countries that supply intermediate products

to these four countries (for further export) will likely be hit by US protectionism. Our

infographic (pages 6-7) gives us a sense of the countries (and product groups) that

provide most value-added to Chinese, Mexican, German or Japanese exports. Other

Asian countries, such as Korea, Malaysia and Taiwan, could be drawn into any trade

spat as well. Much of the value-added is provided by the US, underlining how self-

defeating protectionism can be in today’s integrated world.

A piecemeal increase in trade protectionism is likely to result in losers and winners,

opening the door for other countries to grab a greater share of trade. The main

competitors for US trade are China, Mexico, Germany and Japan, which fiercely

compete with each other so measures against one would benefit the others.

However, other countries could win as well – Vietnam, Thailand and Philippines

could benefit in Asia; the UK in Europe.

Who might replace the US as global demand engine?

Europe can’t, Germany won’t

Despite the rise of nationalist, anti-trade movements in Europe, most European

governments remain committed to free trade. European countries, however, are not

in a position to supplant the US as the main global importer. Most of the larger

countries in Europe, including France, Spain and Italy, face high debt burdens that

make it difficult to ramp up fiscal spending.

Germany has more room to boost fiscal spending, but is unlikely to embark on major

stimulus given Germany’s constitutional requirement for balanced budgets. At the same

time, uncertainty associated with the political cycle over the next two years is likely to

keep private investment and spending subdued across many of these countries.

Medium-term, these countries face high debt levels and demographic challenges that

suggest weaker growth and demand, especially for manufacturing products.

China may have to step in

Asian economies, particularly China, are better suited to replace the US as the

largest global importer medium-term. China has already begun to assume a greater

role in global trade, championing trade deals such as the Regional Comprehensive

economic partnership (RCEP) and using initiatives such as One Belt One Road

(OBOR) to expand its involvement in global trade and investment flows. While the US

and Europe remain the largest consumers of Asian supply-chain products, China is

slowly rising in importance as a final demand destination.

Conclusion

We believe that a 1930s style multi-country trade war is unlikely. However, if the US

increasingly turns away from its role as global ‘importer-in-chief’, rising US

protectionism could have implications for countries beyond those targeted, due to the

prevalence of global supply chains. Global import demand could weaken near-term

as few countries can match US demand. Longer-term, China is likely to play a bigger

role as the final demand destination of the world, building on its mega-trader status.

In other words, putting global trade first will likely more effectively boost the global

economy than will pursuing protectionist policies.

Germany has room to boost fiscal

spending but is constrained by

balanced budget requirements

GSC integration means that

countries beyond those targeted get

hurt as well


11 April 2017 6

Infographic US

Top 5 US imports from China 2016, % of total US imports

Top 5 US imports from Germany

2016, % of total US imports

Source: US Census Bureau

Top 10 countries integrated into China’s export chain

Five biggest products by value-added

Top 10 countries integrated into Germany’s export chain


Japan

↓* 9.2% 7.8%

4.2% 3.0% 2.7%

USA

↓ 7.2% 6.9% 5.8% 3.5% 2.7%

Korea

↓ 7.5% 5.4% 5.1% 2.8% 2.0%

Taiwan

↓ 5.3% 4.0% 3.7% 2.4% 1.6%

Germany

↑ 11.4% 11.4% 5.1% 4.7% 4.1%

Australia

↑ 10.5% 10.2% 7.4% 7.3% 6.5%

Saudi Arabia

↑ 28.1% 13.8% 12.6% 8.5% 6.9%

Russia

↑ 10.8% 9.0% 8.0% 7.7% 4.9%

Malaysia

↑ 6.4% 5.0% 4.0% 2.6% 1.8%

Brazil

↑ 9.1% 8.0% 5.9% 5.5% 5.2%

USA

↑ 15.9% 15.5% 10.9% 5.7% 4.3%

France

↑ 20.3% 12.5% 12.4% 8.7% 7.8%

UK

↑ 17.2% 15.0% 9.9% 7.7% 4.3%

Russia

↑ 17.2% 12.0% 11.7% 10.3% 8.4%

Italy

↑ 23.6% 16.9% 10.4% 9.2% 5.2%

China

↑ 17.2% 15.7% 7.8%

7.1% 6.2%

Switzerland

↑ 24% 14% 10% 9.0% 5.0%

Netherlands

↑ 15% 13% 9.0% 7.0% 4.0%

Spain

↑ 27.4% 12.0% 10.2% 7.4%

4.6%

Austria

↑ 22.3% 15.3% 10.1% 8.2% 5.3%

* GREEN (RED) indicates upward (downward) revision. Movements are based on the changes to value added between from 1995 and 2011; Source: OECD TiVA database

Electrical machinery

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Coke, refined

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products

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mineral products

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11 April 2017 7

US

Top 5 US imports from Mexico 2016, % of total US imports

Top 5 US imports from Japan

2016, % of total US imports

Source: US Census Bureau

Top 10 countries integrated into Mexico’s export chain


Top 10 countries integrated into Japan’s export chain


USA

↓* 29.1% 10.5% 7.8% 4.1% 3.7%

China

↑ 25.9%

11.3% 6.2% 1.7% 1.6%

Japan

↑ 34.1% 10.1% 7.0% 1.7% 1.6%

Germany

↑ 36.3% 12.0% 10.6% 2.5% 2.5%

Canada

↑ 30.7% 12.1% 10.8% 5.6% 3.8%

Korea

↑ 28.5% 10.3% 5.7% 1.6% 1.4%

Taiwan

↑ 24.9% 9.7% 4.6% 1.8% 1.2%

Italy

↑ 32.1% 14.3% 12.5% 3.6% 3.0%

Brazil

↑ 42.0% 10.3% 9.6% 3.8% 2.5%

France

↑ 30.2% 11.9% 8.8% 4.4% 3.1%

China

↑ 14.5% 14.5% 6.6% 6.5% 4.2%

USA

↑ 12.9% 12.9% 11.1% 5.4% 5.1%

Saudi Arabia

↑ 15.7% 15.3% 14.8% 8.1% 7.2%

Australia

↑ 16.2% 14.0% 13.9% 8.7% 8.0%

Indonesia

↑ 17.6% 11.5% 11.1% 10.2% 8.8%

Korea

↑ 14.3% 14.0% 12.9% 7.8% 4.2%

Russia

↑ 18.8% 12.5% 10.0% 9.9% 9.7%

Germany

↑ 24.5% 12.6% 12.2% 5.4% 3.8%

Taiwan

↑ 13.6% 12.7% 7.2% 6.9% 4.3%

Malaysia

↑ 12.3% 11.1% 10.5% 9.5% 9.1%

* GREEN (RED) indicates upward (downward) revision. Movements are based on the changes to value added between from 1995 and 2011; Source: OECD TiVA database

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products

Machinery and

equipment

Motor vehicles,

trailers and semi-

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equipment

Construction

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How likely is a global trade war?


11 April 2017 9

A 1930s-style trade war seems unlikely

Protectionism could be the next brake on trade growth

The global survey of economic activity (global PMI) is at three-year highs. This

recovery should bode well for global trade volumes as there is a strong link between

economic activity and trade volumes (Figures 4-5). In fact, according to the IMF,

about 75% of the decline in goods imports volumes during 2012-15 was attributable

to weak economic activity, especially investment activity.

The recovery in activity and import demand is being led once again by the world’s

largest importer, the US, and by China (see Economic Alert, 13 March 2017, Trade:

US driving global demand recovery). Recent rhetoric from the US administration,

however, suggests that it wants to see the US play a much smaller role as an

importer. The focus now seems to be reducing trade deficits through lower imports

and boosting exports through a mix of protectionist measures as well as trade deal

renegotiations. China seems to be at the centre of this protectionist message.

The tilt towards protectionism poses the next big challenge to world trade recovery.

The fear is that rising US protectionism could lead to an all-out trade war with

partners similar to what was seen in the 1930s, which would have disastrous

consequences given the level of global economic integration today.

Protectionism has been on the rise for some time now

The IMF suggests that protectionism in itself has played only a limited role in the

sluggishness of global import demand since the 2008-0 global financial crisis (GFC).

However, data over the past decade shows that protectionism has been rising

globally.

Since the GFC, protectionist measures have increased (Figure 6), with the US

(Figure 7) representing the highest number: c.20% of the G20 protectionist

measures, including subsidies (state aid), duties and tariffs. While President Trump’s

recent comments on trade have grabbed attention, the US has been shifting towards

a more protectionist stance since 2008 (Figure 8).

Figure 4: Trade growth is closely related to global

industrial production (% y/y, 6mma)

Figure 5: Global manufacturing PMIs suggests continued

recovery in trade values (% y/y, 6mma)

Source: CPB, Standard Chartered Research Source: CPB, Standard Chartered Research

Industrial production

Trade volumes

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16

Global manufacturing

PMI

Trade volume

0.0%

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1.0%

1.5%

2.0%

2.5%

3.0%

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49

50

51

52

53

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

75% of the decline in goods imports

volumes in 2012-15 was due to

weaker economic activity

But protectionist measures have

increased since the GFC with the

US having imposed the highest

number of measures

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11 April 2017 10

Figure 6: Numbers of trade discriminatory measures imposed since 2008

G20 countries

Trade discriminatory measures

have increased since the GFC

Source: 20th Global Trade Alert Report, Standard Chartered Research

Figure 7: Numbers of trade discriminatory measures imposed since 2008

By country – 2008-2016

US took the highest number of

trade discriminatory measures,

followed by India

Source: GTA, Standard Chartered Research

0

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2009 2010 2011 2012 2013 2014 2015 2016

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UK

Turkey

South Korea

South Africa

Saudi Arabia

Russia

Mexico

Japan

Italy

Indonesia

India

Germany

France

China

Canada

Brazil

Australia

Argentina

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Figure 8: US imposed non-tariff barriers on Mexico and Canada since the GFC

Recent examples of trade barriers

In 2009 and 2013 the US imposed Country of Origin Labelling (COOL)

restrictions on beef, pork, lamb, chicken, certain types of fish, ginseng, all fruits

and vegetables and some nuts. COOL means that labels need to specify where

items were produced. Canada and Mexico complained to the WTO that this was

a breach of US obligations toward the organisation. The WTO ruled that COOL

was illegal and that Canada and Mexico could impose tariffs on the US of

around USD 1bn in response. A 2015 US Department of Agriculture study

conducted by the Office of the Chief Economist estimated that while consumers

expressed satisfaction with the new labelling, implementation costs ran into

USD 2.6bn for producers while consumers paid an estimated USD 9bn more

than they would have without the COOL regulations.


11 April 2017 11

Why is protectionism back in vogue?

There is a historically strong connection between slow economic growth and rising

protectionism. The Great Depression of the 1930s was accompanied by a sharp rise

in protectionist policies. A notable increase in protectionism was also witnessed in

the 1970s and 1980s when the global economy went through a series of shocks and

slowed. Protectionism recently comes on the heels of the global financial crisis.

Protectionism aims to make domestic production more attractive than foreign

production. This can be done by raising the price of the foreign product relative to the

domestic product (tariffs and duties), lowering domestic production costs (subsidies)

or restricting access to the domestic market (quotas, local content requirements,

exchange controls, etc.). While the underlying reason for greater protectionism is

usually slow growth, governments may also pursue protectionism during times of

economic expansion. Examples include:

1. Rebalancing trade deficits – A mercantilist view that deficits are bad for the

economy and need to be eliminated through protectionist policies

2. Safeguarding jobs – Protectionism is seen as a tool to help protect jobs in

industries that face ‘unfair’ competition from cheaper imports

3. Reducing income inequality – By protecting jobs and production in domestic

industries, income inequality reduction can be targeted; Government can also

use extra earnings from tariffs, etc., to support disadvantaged sections of society

4. Supporting an infant industry – Shielding players in an industry that the

government is keen to promote domestically from foreign competition through

tariff or non-tariff barriers

5. Bolstering national defence – Protecting industries that are crucial for

maintaining and protecting sovereignty, including defence and energy

The resurgence of protectionism since the GFC is a combination of almost all of

these driving factors, but is being championed by the Trump administration as a way

to tackle employment issues and growing income inequality in the US.

US elections – A watershed for world trade

Despite the stealthy rise in protectionism since the GFC, leaders from G20

countries have shunned protectionism. The September 2016 G20 Leaders Summit

communiqué included this statement:

We reiterate our opposition to protectionism on trade and investment in all its

forms. We extend our commitments to standstill and rollback of protectionist

measures till the end of 2018, reaffirm our determination to deliver on them and

support the work of the WTO, UNCTAD and OECD in monitoring protectionism.

Since the election of Donald Trump in November 2016, the US administration has

openly discussed using more protectionist measures to achieve ‘fair and balanced’

trade with partners. As a result, the latest G20 communiqué (March 2017)

dropped all reference to opposition to protectionism. The fear now is whether

other countries will retaliate and whether this could lead to a dramatic global trade

war similar to what was seen in the 1930s. Several countries could get caught in a

US-begun trade war given the high level of integration in global trade.

Protectionist ideas have come back

in vogue on the old premise that

they might help domestic

production

Donald Trump was elected on a

campaign heavy on protectionist

proclamations


11 April 2017 12

Not going back to the 1930s

We define a global trade war as an event similar to what was seen in the 1930s,

which involved spiralling protectionism across a large number of countries that had

devastating consequences for world trade and the global economy.

Risks to global trade from protectionism are on the rise given the increased

political acceptability of protectionism now, compared to when we wrote our first

piece on trade (see Special report, 9 April 2014, Global Trade Unbundled).

However, we assign a low probability to an all-out global trade war because of

four key factors:

1. The global economic environment is different today than it was in the 1930s.

Flexible currency regimes (unlike in the 1930s) allow currencies to be used for

shock absorption, while in the 1930s trade was the main adjustment mechanism.

2. The World Trade Organisation (WTO) covers 98% of world trade and

imposes rules of engagement for trade partners. The WTO provides a channel

for addressing trade disputes, discouraging tit-for-tat trade wars. Flouting WTO

rules or withdrawing from the WTO would be self-defeating for most economies.

3. The rise of global supply chains and the fragmentation of production

across regions (see Special report, 27 May 2015, Global Supply chains: New

directions) make a focus on bilateral trade meaningless. Tariffs imposed based

on bilateral trade are likely to result in losses for the country imposing the tariffs.

4. A number of multilateral trade deals are still being negotiated and would

cover a wide range of countries and products. These deals suggest that many

countries recognise the benefits of free trade in a multilateral setting.

Why today is different from the 1930s

Philosopher J. Santayana said, “those who cannot remember the past are

condemned to repeat it”. To avoid similar mistakes, reviewing the 1930s outbreak of

protectionism and the resulting collapse of world trade seems worthwhile. Between

1929 and 1933 world trade collapsed by two-thirds (Figure 9).

Figure 9: World Trade contracted by two-thirds between 1929 and 1933

USD mn gold equivalent

World trade collapsed 67%

between 1929 and 1933

Source: Charles P. Kindleberger, ‘The World in Depression 1929-1933’, Standard Chartered Research

1929: USD 2,998 1930: USD 2,739

1931: USD 1,839

1932: USD 1,206

1933: USD 992

Political acceptability and

justification of protectionism have

risen recently

The 1930s situation is a classic

example of protectionism and

economic collapse





11 April 2017 13

The protectionist response varied and certain countries went further than others. A

key factor behind this variation in trade policy response was the adherence – or not –

to the gold standard (Eichengreen, 2010). If countries had not been so ideologically

attached to the idea of the gold standard – and the underlying concept of a ‘strong

currency’ – allowing currency adjustment could have avoided trade restrictions.

Studies have shown that countries who abandoned the gold standard were less likely

to increase import tariffs.

The facts – Trade and currency war

In 1930, the US passed the Tariff Act of 1930, also called the Smoot-Hawley tariff. At

the time, strong resistance from many academics translated into an open letter from

1,000 members of the American Economic Association, who begged President Hoover

to veto the Act. It was passed nevertheless and increased duties on almost 900

American import products (Figure 10), originally intended to protect American farmers

widely hit by a combination of a historic drought, loss of European markets during WWI

and the resurgence of European agricultural production. A global tariff war erupted.

Spain passed the Wais tariff in July 1930 against the US, France and Italy, with

certain duties increasing 100% to 150%, such as on autos.

Switzerland criticised new tariffs on watches (from 199% to 266% for the most

popular models), embroidery and shoes and boycotted US exports, mostly cars

and typewriters.

Italy retaliated against tariffs on hats and olive oil by imposing high taxes

(nominal and depending on models) on US and French automobiles in June

1930. US automobiles were seen as a major danger to national champion Fiat.

Canada raised its own general protective tariff following the US Tariff Act: the

Canadian Emergency Tariff in September 1930 increased duties on all

“important industries” by 50%. This had dramatic consequences for the US and

Canada, deeply intertwined from a trade perspective. “The mutilation of the

billion dollar market that was Canada may be regarded as the most deplorable

and the most costly single fruit of the Smoot-Hawley Tariff” (Jones, 1934).

Britain responded, after having tried to salvage free trade – with the Abnormal

Import Act in November 1931, which gave the Board of Trade the option to

adjust duties up to 100% on any product. It was followed by the Horticultural

Product Act, then the Import Duties Act of 1932 and the Imperial Preference Act

(adopted in some forms by Canada through the Ottawa Agreements). By 1932,

the average American Tariff on dutiable imports was 59.1%.

France – hit much later than other nations – reacted only in late 1931 by

implementing a system of quotas: by 1936, 65% of imports in France were under

quotas. Most tariffs in France at the time were regulated by treaties and could

not be altered without treaty revision, hence the quotas, which were aimed

particularly at the US. This quota system has been viewed as one of the most

punitive and inflexible arrangements; France was the only major country to

continue to decline after 1935.

This cycle of “beggar-thy-neighbour” policies had drastic consequences: within three

years, imports to and exports from the US had collapsed by 70% and 69%

respectively. The rest of the economy was plunged into an unprecedented crisis: real

national income fell by 36% by 1933, unemployment went from 3% to 25%, and more

than 40% of all banks were permanently closed.

A chain reaction of trade and

currency war precipitated and

nurtured the economic crisis

Within three years imports to and

exports from the US collapsed by

70% and 69%, respectively


11 April 2017 14

One crucial element in the 1930s event is the role played by – mostly fixed – currency

regimes. Failure to coordinate devaluations of national currencies (abandonment of the

gold standard) for some, or to maintain a fixed exchange rate for others, was responsible

for a drastic deterioration in economic conditions. Rigid currency regimes, the lack of

coordination between the main trading partners and the constraints of the “impossible

trinity” (Figure 11) led to diverging – and sometimes contradictory – policy choices.

Currency regime choices shaped policy responses to the crisis. The gold exchange

standard dictated the available policy options, and was directly linked to the outbreak of

protectionism and the collapse of global trade in the space of a few years (Figure 12).

Figure 10: American tariff rates on selected products

Some tariff rates went up by over

1,000%

Article 1913 1922 1930 Variation

Raw sugar full duty 1.26₵/lb 2.21₵/lb 2.50₵/lb +98%

Raw sugar Cuban duty 1.005₵/lb 1.76₵/lb 2.00₵/lb +99%

Cattle under 700lb Free 1.50₵/lb 2.50₵/lb +25%

Cattle over 700lb Free 1.50₵/lb 3.00₵/lb +30%

Milk Free 2.50₵/lb 6.50₵/lb +65%

Butter 2.50₵/lb 8.00₵/lb 14.00₵/lb +460%

Pig-iron Free 75.00₵/ton 1.125$/ton +1,125%

Hides Free Free 10% +10%

Shoes and boots Free Free 20% +20%

Matches <100 to a box 3.00₵/gross 8.00₵/gross 20.00₵/gross +566%

Source: Abraham Berglund, “The Tariff Act of 1930”, American Economic Review Sept 1930, Standard Chartered Research

Figure 11: The monetary system today differs from that in the 1930s

The gold standard

A gold standard is a monetary system where the standard economic unit of account is based on a fixed quantity of gold. The

gold exchange standard means that the government guarantees a fixed exchange rate to the currency of another country that

uses a gold standard, independent of the types of notes or coins used as a mean of exchange. Effectively, these means of

exchange have a fixed external value in terms of gold.

The general Gold Standard was abandoned/suspended by most developed nations during WWI. But in 1919 and the

following years, the US, Europe and Japan reinstated a form of gold parity.

Most studies show that the post-WWI gold parities were not consistent with post-war price levels. As soon as the first signs of

the 1929 crisis started to be felt, problems arose. Compounding the economic problems was that any metallic standard

requires strong cooperation within an international monetary system, which was not in place.

The impossible trinity (or “Trilemma”) explains that it is impossible to have at the same time:

A fixed exchange rate (here, the gold standard)

Free movement of capital (open trade)

Independent monetary policy

Theory and practice have shown that a given central bank will only be able to pursue two of the three policies simultaneously.

When a succession of shocks started (stock-market crash, bank failures, etc.) central banks – aware that they had to

maintain the external balance to keep the fixed exchange rate and not lose gold reserves – implemented contractionary

monetary policies leading to deflation (the “deflationary vortex” has been associated with a metallic standard, output decline

and unemployment).

An economic dogma of fiscal balance likely reinforced the vicious cycle: fiscal health was seen as necessary and fiscal

policy/deficit was eliminated as a response to the crisis.

Governments turned to trade as the only adjustment variable, embracing protectionism is various forms: import restrictions,

tariffs, non tariff barriers, etc.

Source: Standard Chartered Research


11 April 2017 15

Economies are structured differently today

Despite the rise in protectionist discourse and negative perceptions about the effects

of globalisation among certain western constituencies, today’s economic context is

vastly different than in the 1930s.

In the 1930s, inflexible currency regimes were a major reason for the trade war.

Refusing to let the currency play an absorption shock role, most countries turned to

trade for adjustment. Today, especially since the 1997 Asian crisis, most countries

have abandoned or have flexible currency pegs, or have adopted hybrid regimes.

History has shown the benefits of changing or eliminating the currency anchor

instead of adhering to the ill-fated notion of the 1930s that a ‘strong currency’ will

help in times of crisis.

The importance of the WTO

The WTO provides another strong backstop to a slide back into a 1930s style global

trade war. Unlike in the 1930s, most countries are now WTO members. All 164 WTO

member countries have agreed to use a multilateral system of settling disputes

instead of taking action unilaterally: this means abiding by agreed procedures

(Dispute Settlement Understanding or DSU) and respecting judgements. The

dominance of the WTO (it covers 98% of global trade) makes it more costly and

difficult for any country to try to go it alone.

WTO membership is vital, US withdrawal is improbable

The US helped create the dispute resolution system and uses it the most; the US

exiting the system seems destructive. The WTO is also the forum for negotiating

lower trade barriers. It allows countries to gain non-discriminatory access to markets

and permits its members the benefits and security of a rules-based trading system.

The suggestion of US withdrawal from the WTO would likely be met with resistance,

Figure 12: Exchange rate and payment regimes, sample countries 1929-36

Currency regimes, date of departure from these regimes, year of imposition of FX controls

Sterling bloc countries

Gold bloc countries

Other gold standard countries

Imposition of FX controls

1929 Argentina, Australia Canada, Brazil, Spain, Uruguay

1930 New Zealand Peru, Turkey

1931

Denmark, Egypt, Finland, Norway,

Japan, India, Sweden,

UK, Portugal, Thailand

Columbia, Mexico

Austria, Bulgaria, Czechoslovakia,

Denmark, Germany,

Hungary

1932 Chile, Greece Romania

1933 South Africa Cuba, US, Philippines

1934 Italy

1935 Belgium

1936 France, Netherlands,

Switzerland Indonesia Poland

Source: Eichengreen & Irwin , The Journal of Economic History, vol 70, 2010, Standard Chartered Research

98% of world trade, market access

to trading partners and a

recognised international body to

protect a rule-based system:

walking out of the WTO is not a

realistic option

Inflexible currency regimes played a

major role in the 1930s crisis


11 April 2017 16

especially from corporate America: US exporters would automatically lose critical

market access around the world, sacrificing most-favoured nation (MFN) rights in 164

countries. The Peterson Institute for International Economics estimates that 60% of

US trade is outside of Free Trade Agreements. In order to access these markets, the

US relies on the WTO’s non-discriminatory MFN tariffs. If the US left the WTO, any

country in the world could raise tariffs on US exports to whatever level it chose.

Dispute settlement: a tested predictable framework

It is viewed as a central pillar of the multilateral trading system.

Priority is given to mutually agreed solutions.

If no agreement, emphasis has been put on being efficient, with clearly defined

rules and a timetable for case completion. The DSU has detailed procedures and

corresponding deadlines to increase efficiency.

No more than one year for a panel ruling and no more than 16 months if the

case is appealed.

Urgent cases should be addressed even more quickly.

WTO member nations are obliged to accept the process as exclusive and

compulsory.

In 2015, the WTO announced it had reached a 500th case milestone amid what has

been viewed as growing confidence among members, with the dispute settlement

system generally viewed as fair, effective and efficient. Two-thirds of members have

used the system at least once. Out of 500 disputes, 80% have reached conclusion –

a much higher rate than for any other arbitration system. Out of these, about 28%

resulted in a bilateral settlement or withdrawal; 72% of the disputes went to litigation.

Only in 10% of cases has the WTO authorised a member to retaliate against a

defendant member. 90% of rulings have been accepted and followed (Figure 13).

Unilateral action

Unilateral actions by a member against another member are not permitted. Even if a

member feels a WTO trading partner is breaking the rules, retaliatory measures can

only be taken after recourse to dispute settlement under the rules and procedures of

the DSU. Actions taken must be based on the findings of an adopted panel or

Appellate Body report or arbitration award. Counter-measures can only be imposed

on the basis of WTO authorisation.

Criticisms and weaknesses

Despite a solid framework, a full dispute settlement procedure can take longer than

expected and there are no provisional measures (interim relief) available to protect

the economic and trade interests of the complainant during the dispute settlement

procedure.

In the case of non-implementation of rulings, not all members have the same

leverage or practical ability to resort to the suspension of obligations: the situation for

powerful economies such as the US or the EU differs from that of smaller developing

countries. In some cases, suspension of concessions has been ineffective in bringing

about implementation because of vastly different economic weight (the WTO notes

that these cases are the exception rather than the rule).

80% of cases resolved, of which

¾ went to litigation;

compliance rate with dispute

settlement rulings is 90%

While implementation and

procedures are the same for all,

varying economic powers mean

different leverage


11 April 2017 17

Figure 13: Jurisdiction, execution and compliance

If settlement procedures fail to

bring about the desired result, a

complainant state may suspend

WTO preferential trade agreements

with the defendant

A WTO member is committed to bring all multilateral disputes to the WTO for

settlement. Article 23 of the DSU not only excludes unilateral action, but it also

precludes the use of other fora for the resolution of a WTO-related dispute. The

WTO estimates that 90% of the dispute settlement rulings result in compliance.

This is what happens after a dispute is settled:

The DSU demands that within 30 days of the adoption of the report (Figure 14) the

member concerned needs to report how it will implement the rulings.

- The member can explain that it is impracticable to comply immediately: it is then

given a maximum of 15 months to do so.

- If no agreement is reached about the reasonable period of compliance, the

issue is subject to binding arbitration

- The DSU is supposed to keep the implementations of the ruling under

surveillance

What happens if all of this fails?

- If a member fails to carry out the ruling within the ‘reasonable period’, it may

negotiate with the complainant state for mutually acceptable compensation.

This compensation is expected to consist of a concession by the respondent

state on a product or service of interest to the complainant state.

If no agreement on compensation is reached within 20 days or the expiry of a

‘reasonable period’:

The prevailing state can request authorisation from the WTO to suspend

concessions or other obligations that govern trade agreements with the member in

question. The WTO makes clear that retaliation is not preferred and even sets the

criteria for retaliation. But authorisation to suspend concessions in this context is

semi-automatic, even if temporary.


Figure 14: Duration of dispute settlement procedure

Approximate and target periods for each stage of a dispute settlement

Agreements are flexible and

countries can settle their dispute

themselves at any stage

Periods Stage of the procedure

60 days Start of the procedure: Consultations, mediation, etc

+ 45 days (3.5 months) Panel set up and panelists appointed

+ 6 months (9.5 months) Final panel report to parties

+ 3 weeks (c.10 months) Final panel report to WTO members

+ 60 days (12 months) Dispute Settlement Body adopts report (if no appeal)

Total= 1 year without appeal

+ 60-90 days (1 year 2- 3 months) Appeals report

+ 30 days (1 year 3- 4 months) Dispute Settlement Body adopts appeals report

Total = 1 year with appeal

Source: WTO, Standard Chartered Research


11 April 2017 18

Several multilateral agreements are still being negotiated

Surveys suggest that the general population in western economies such as the US

and France blame globalisation for income inequality and support protectionist

policies. However, this is not true across all countries. Many emerging markets such

as Vietnam, Philippines and India strongly support globalisation and are likely to

continue to push for broader trade agreements that lower trade barriers (Figure 15).

The successful ratification of the Trade Facilitation Agreement (TFA) in February

2017 by two-thirds of WTO members suggests that many countries still see the

benefit of multilateral trade agreements. While the US has pulled out of the Trans

Pacific Strategic Economic Partnership TPP and several roadblocks are seen for the

Transatlantic Trade and Investment Partnership (TTIP), a number of multilateral

agreements are still being negotiated (Figure 16). These agreements are hard to

conclude given the complex nature of negotiations especially on issues such as

services. We outline some of the trade agreements that are in place or still being

negotiated.

Figure 15: Globalisation is the increasing movement of products, ideas,

money, jobs, culture and people around the world

Overall, do you think globalisation is a force for good or bad for the world?

Source: YouGov Survey Results - Topline Findings, Standard Chartered Research

Force for good Force for bad

-40% -20% 0% 20% 40% 60% 80% 100%

GB France Finland

Denmark Norway Sweden

Germany Australia

Hong Kong Indonesia Malaysia

Philippines Singapore

Thailand Vietnam

US India UAE

Saudi Arabia

Protectionism discourse has risen,

but not everyone agrees


11 April 2017 19

Figure 16: Key multilateral trade agreements

Trade agreement

Under negotiation

Trans Pacific Strategic Economic Partnership

(TPP)

A free trade agreement between 11 countries - Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New

Zealand, Peru, Singapore and Vietnam. The finalised proposal was signed on 4 February 2016, concluding seven years of negotiations. TPP currently cannot be ratified due to US withdrawal from the agreement on 23

January 2017. US entered into negotiations for the TPP in March 2008. Participating nations aimed to complete negotiations in 2012, but the process was prolonged by disagreements over contentious issues.

Transatlantic Trade and

Investment Partnership (TTIP)

Currently under negotiation between the EU and US. The negotiations aim at removing trade barriers in a wide range of economic sectors. Negotiations were launched in 2011 in large part due to the continuing

economic crisis and the stalling of the multilateral trade negotiations in the WTO – the so-called Doha Development Agenda. It covers three broad areas – market access, specific regulation, and broader rules and principles and modes of co-operation. Independent research shows that TTIP could boost: the EU’s economy

by €120bn, the US economy by €90bn and the ROW by €100bn. Negotiations will not be concluded until 2019-20.

Regional

Comprehensive Economic Partnership

(RCEP)

A Free Trade Agreement scheme of the 10 ASEAN member states and its 6 FTA partners (Australia, China, India, Japan, Korea and New Zealand), formally launched during the 2012 ASEAN summit. Expected to be

concluded by end-2017, it hopes to build on efforts made in the East Asia Free Trade Agreement (EAFTA) and the Comprehensive Economic Partnership in East Asia (CEPEA) initiatives. RCEP is viewed as an alternative to the TPP trade agreement. RCEP potentially includes more than 3 billion people (45% of world’s

population) and a combined GDP of USD 21.3tn (40% of world trade). US withdrawal from the TPP has improved the chance of success for RCEP.

Comprehensive

Economic and Trade Agreement (CETA)

A Free Trade Agreement between Canada and the EU. Canada’s biggest bilateral initiative since NAFTA. The agreement will eliminate 98% of the tariffs between Canada and the EU. Negotiations were concluded in

2014. The European Parliament approved the deal on 15 February 2017; most of it can be applied provisionally from as early as April 2017. Remaining parts of the agreement are subject to ratification by national legislatures.

African Tripartite Free

Trade Agreement (TFTA)

The Tripartite FTA (TFTA) was signed on10 June 2015 by most of the 26 countries covered by the deal. It brings together member and partner states of the Common Market for Eastern and Southern Africa

(COMESA), the East African Community (EAC) and the Southern African Development Community (SADC). The 26 countries represent 48% of the African Union membership, 51% of the continent’s GDP and a combined population of 632mn. Merchandise trade with the Tripartite region increased to USD 55bn in 2012

from USD 23bn in 2004. Significant structural and policy bottlenecks still remain to be overcome.

Existing Agreements

North American Free

Trade Agreement (NAFTA)

An agreement signed by Canada, Mexico and the United States creating a tri-lateral, rules-based trade bloc in

North America. The agreement came into force on 1 January 1994. US President Trump has put renegotiating NAFTA at the top of his economic agenda.

Trade Facilitation Agreement (TFA)

A major milestone for the global trading system was reached on 22 February 2017, when the TFA was ratified

by two-thirds of the WTO (164 members) and entered into force. The TFA is the first multilateral deal concluded in the 21-year history of the WTO. The agreement seeks to expedite the movement, release and clearance of goods across borders and creates a significant boost for the multilateral trading system.

Estimates by the WTO indicate that full implementation of the TFA could reduce costs by an average of 14.3% and boost global trade by up to USD1tn per year. Developed countries have committed to immediately implement the agreement.

South Asian Free Trade

Agreement (SAFTA)

An agreement reached in 2004 at the 12th SAARC summit, which came into force on 1 January 2006. The 7

South Asian nations signed a framework agreement on SAFTA to reduce customs duties of all traded goods

to zero by 2016.

ASEAN Free Trade Area

(AFTA)

A trade bloc agreement by the Association of Southeast Asian Nations supporting local manufacturing in all

ASEAN countries. The AFTA agreement was signed in 1992 and now comprises 10 countries (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia). The primary

goals of AFTA are the elimination of tariffs and non-tariff barriers within ASEAN. The next step is the ASEAN Economic community (AEC) due to start at the end of 2015. The aim is to transform ASEAN into a region with free movement of goods, services, investment and skilled labour and freer flow of capital.

Gulf Co-operation Council (GCC)

A political and economic union of Arab states, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the

United Arab Emirates. The unified economic agreement between the GCC countries was signed in November 1981. A GCC common market was launched on 1 January 2008 potentially removing all barriers to cross-country investment and services trade. A customs union was declared in 2003 but practical implementation

has lagged.

Southern Common Market (MERCOSUR)

An economic and political agreement among Argentina, Brazil, Paraguay, Uruguay and Venezuela, with

Bolivia becoming an acceding member on 7 December 2012. MERCOSUR was established in 1991. The Southern Common Market promotes free trade, fixing of a common external tariff and adopting a common

trade policy and the coordination of macroeconomic and sector policies to ensure free competition between member states.

Source: WTO, Standard Chartered Research

How will US protectionism affect the US?


11 April 2017 21

No trade war, but greater US protectionism While we believe that a 1930s style trade war is unlikely in today’s global macro

environment, rhetoric from the new US administration, including President Trump and

his trade advisor Peter Navarro, suggest that the US is looking to adopt a more rigid

stance on trade. However, there is little clarity so far on what precise measures will

be adopted.

Implications for the US: The boomerang effect

President Trump’s threat to take measures against countries that the US has a large

trade deficit with (see On the Ground, 5 October 2016, US-Trump’s Trade tariffs-

Back to the future?) suggests that he favours a mercantilist and bilateral view of

trade. As a result, plans such as the border adjustment tax (BAT), which penalises

importers while subsidising exporters, are being discussed.

The Trump administration believes that lower trade deficits will help bring production

back to the US and create jobs in manufacturing. It plans to use revenue generated

by these tariffs to lower domestic taxes (we see this as a high probability) or increase

government spending on infrastructure (we see a low probability). We believe that

significantly more inward-looking US policies would be self defeating and detrimental

to the US economy. In terms of economic theory, net exports are identical to the

difference between a country’s saving and investment. A high trade deficit in the US

suggests that the US does not save as much as it invests and hence needs capital

inflows to fund its investment.

Thus, the trade deficit should be reduced by raising savings in comparison to

investment. But the US administration is planning the opposite. Cutting taxes and

raising infrastructure spending will likely increase economic demand. With the US

economy already operating close to full employment, increased demand would

probably push up domestic prices (indirectly making imports cheaper) or will be

diverted to imports. Fed policy is likely to aid this shift towards greater imports as

higher interest rates would encourage US dollar strength and make imports cheaper.

Ultimately this would lead to a wider not a narrower current account deficit.

Figure 17: Periods of high deficits do not always indicate job losses

US trade balance (% of GDP) and US unemployment rate (%)

Source: IMF, BEA, Standard Chartered Research

Trade balance/GDP (RHS)

Unemployment rate

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

3

4

5

6

7

8

9

10

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Trump’s reflationary policies, if

successful, will only widen the trade

deficit




11 April 2017 22

Protectionism does not necessarily lower overall imports

Targeted tariffs on particular countries such as China, Mexico and Japan would only

divert this import demand from these countries to others that produce similar goods.

So while these tariffs might lead to a drop in bilateral deficits with targeted countries,

they are likely to result in widening deficits with other countries. A study of 30

randomly selected cases of US government anti-dumping measures or imposition of

countervailing duties over a 15-year period showed that imports of these products

rose by 25% from the year before the measures were taken (Tuerck, 2016).

Protectionism does not lead to net job gains

One argument put forth in the US for protectionism is that higher imports and trade

deficits lead to substantial job losses. This is simply not true. It is now increasingly

recognised that periods of strong import growth can actually be related to periods of

low unemployment, as strong imports indicate strong underlying demand, as

happened in the US in the 1990s (Figure 17).

According to an analysis done by the Bureau of Labour Statistics, import competition

and overseas plant relocations accounted for less than 3% of job separations due to

mass layoffs between 1996 and 2011 for the US economy as a whole.

Another study calculated that goods imports actually supported nearly 16mn net

direct and indirect jobs in the US in 2011 (Trade Partnership Worldwide, LLC, 2013)

(Figure 18). These import-related jobs are widely spread across sectors of the

economy, and small businesses (with less than 50 employees) accounted for c.53%

of all importers (Trade Partnership Worldwide, LLC, 2013; Figure 19).

So there is little evidence to support the view that imports lead to net job losses in the

economy. Protectionism, on the other hand, might lead to job losses in the wider

economy even if it safeguards jobs in certain sectors of the economy. This happened

in the US in 2002 when tariffs were imposed on imports of certain types of steel for a

period of three years. The US steel industry employed c.185,000 people in

December 2002. According to an impact analysis conducted by The Consuming

Industries Trade Action Coalition (CITAC) Foundation, around 200,000 jobs were lost

in industries that used steel as an input in their production as a result of the tariffs.

These industries included fabricated metal products and household appliances, as

well as chemicals and petroleum refining.

Figure 18: Import-related jobs are widely spread across sectors in the US

American jobs supported by imports, 2011

Sector Number of jobs

Share of employment

in sector (%)

Services 15,203,548 12.1

Consumer services 4,143,489 15.8

Business services 3,862,419 10.5

Education, health care, social assist. 2,800,720 11.9

Retail trade 1,779,501 10.0

Finance, insurance 1,122,793 11.8

Transportation and warehousing 815,287 16.8

Wholesale trade 611,022 10.0

Utilities 68,317 11.9

Government 2,879,737 11.9

Construction 2,097,651 24.0

Manufacturing -2,961,099 24.0

Agriculture, forestry, fisheries -419,983 12.0

Mining -387,047 27.1

Net total 16,412,808 9.3

Source: Trade Partnership Worldwide, LLC, Standard Chartered Research

Protectionism would hurt small

businesses, which account for 53%

of all US importers

Imports of targeted goods actually

rose in the years following the

measures


11 April 2017 23

Protectionism risks not only hurting net import-related jobs but also jobs in the export

sector, if trade partners retaliate. 1 in 5 jobs in the US are supported by trade. A

tit-for-tat trade war between US and its major trading partners could negatively

impact the US labour-market substantially.

The Trump administration ignores the economy-wide benefits of trade (including

imports) for employment. Instead, it blames job losses in the manufacturing sector on

unfair trade deals. However, it is increasingly accepted that technology rather than

trade has led to job losses in manufacturing across countries. The manufacturing

sector has been losing jobs since the 1950s, well before major trade deals such as

NAFTA came into play or China entered the WTO (see Economic Alert, 27 February

2017, ‘The problem with Trump’s trade and jobs rhetoric’). Companies facing higher

production costs because they are forced to set up production operations in the US

or because of costlier imports are likely to pursue a more aggressive automation and

technology adoption policy to reduce costs, leading to job losses medium-term.

Protectionism hurts consumers, especially the poor

The strongest argument in favour of trade has been the benefit to consumers that

comes with the greater choice, higher quality and lower prices that traded goods

afford. Thus, trade restrictions hurt consumers the most. Higher tariffs/import

restrictions either raise the price or lower the availability of final goods that use the

protected good as an import. For example, sports shoes in the US are subject to a

tariff of c20%. This has not reduced imports of these shoes (c.98% of these shoes

are still imported) but the prices of the shoes have almost doubled (Figure 20).

Evidence is also growing that tariffs are particularly damaging to lower-income

households, which tend to spend more on traded goods such as food and

apparel. A recent study estimating the distributional effects of tariffs across

households (Furman, 2017) shows that the burden imposed on poor households is

significantly higher than that for rich households (Figure 21).

Trump’s proposals of a 45% tax on China and Japan and 35% on Mexico would

impose a regressive consumption tax on a typical US household of USD 11,000 over

a five-year period and would reduce the mean after-tax income of the lowest 10% of

US households by 18%, compared to by just 3% for the highest 10% of US

households (Tuerck, 2016; Figure 22).

A more comprehensive tariff increase of 45% on imports from all countries (and not just

China, Japan and Mexico) would raise the impact on poorer households to a whopping

53% of their annual income, compared to only 7% for the highest income earners.

Figure 19: Small businesses account for over half of all

US importers (employment size of US importers, 2011)

Figure 20: US imports most of its footwear from China

% share of total footwear imports, 2015

Number of employees

Companies (with an import transaction)

Share of total importers (%)

1-19 78,404 42.6

20-49 18,976 10.3

50-99 9,750 5.3

100-249 7,974 4.3

250-499 3,298 1.8

500 or more 5,140 2.8

Other* 60,418 32.8

Note: * Number of companies for which number of employees is unknown

Source: Baughman et al, Standard Chartered Research

Source: American Apparel and Footwear Association, Standard Chartered Research

0 5 10 15 75 80

Thailand

Dominican Republic

Mexico

Italy

Brazil

India

Cambodia

Indonesia

Vietnam

China

1 in 5 jobs in the US is supported by

trade

Consumers have less choice or face

higher prices when imports are

restricted

Trump’s proposed tariffs on China

and Mexico would hurt poorer US

consumers more




11 April 2017 24

US is highly integrated into supply chains

A key measure of how integrated a country is into global supply chains is the import

content of exports. The US shows low levels of integration on this measure, with only

15% of US exports dependent upon imports from the rest of the world compared to

c.25% for Germany and China or c.40% for Korea. This seems to suggest that

protectionism aimed at reducing imports would not disrupt US exports significantly.

However, this measure (of backward integration into global supply chains) is

misleading for the US. The US is not a big export hub so it does not import much to

re-export. Its integration into global supply chains is driven more by its status as the

largest importer in the world. This is evident from a high level of forward integration.

Around 30% of US gross exports are destined for re-export by import partners. Many

of the goods that the US imports from other countries have US content. As a result,

the imposition of tariffs or similar protectionist measures on imports would actually

harm US exports that are embedded in these final imports to the US (Figure 23).

Figure 21: Tariff burden relative to after-tax household

income

Figure 22: Effect of Trump tariffs on China, Mexico and

Japan on US households over five years

Mean after-tax income (USD)

Tariff burden (USD)

% of mean after-tax income

All households 56,437 11,100 4

Lowest 10% 5,348 4,670 18

Second 10% 15,182 4,830 6

Fifth 10% 38,735 8,430 4

Ninth 10% 97,430 17,390 4

Highest 10% 172,669 25,005 3

Source: Furman 2017, Standard Chartered Research Source: Tuerck 2016, Standard Chartered Research

0.0% 0.2% 0.4% 0.6% 1.4% 1.6%

Lowest

Second

Third

Fourth

Fifth

Sixth

Seventh

Eigth

Ninth

Highest

Figure 23: GSC forward participation is high in commodity exporters and advanced countries

Share of gross exports and change in share since 1995

Source: OECD, Standard Chartered Research

2009

Change since 1995 -20

-10

0

10

20

30

40

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RU SA JP AU ID US PH MY HK BR GB KR DE IT FR ES SG IN TH EU ZA TR NZ CA VN CN MX

Many US imports have US value-

added content

How does US protectionism affect the RoW?


11 April 2017 26

Winners and losers The US administration has suggested that it is looking closely at trade arrangements

involving countries with which the US has high trade deficits or from which the US

imports significantly (Figure 24). As a result, countries such as China, Mexico,

Germany and Japan have been singled out in media commentary.

More will lose than intended

The impact of US protectionism on the rest of the world (RoW) is partly a function of

how important the export sector is for a country’s GDP. This varies sharply. While

China has the largest trade surplus with the US and accounts for c.20% of all US

imports, the impact of protectionism on its GDP is moderated by the low relative

importance of exports in China’s GDP (22% of GDP). Mexico, on the other hand, is

more dependent on exports (c.35% of GDP), so even though it accounts for only

c.13% of US imports; the impact on its GDP is almost comparable to that of China

(Figure 25). For each of these economies, the extreme case of a complete loss of

exports to the US would lower their GDP by c.4.7%. Canada follows closely behind,

with a sizeable c.4.0%-of-GDP impact. Other countries that would see a significant

impact on their GDP include Germany, Ireland, Vietnam, South Korea, Singapore,

Malaysia and Japan.

However, the nature and prevalence of GSCs suggests that the impact of US

protectionism is likely to reach beyond just these countries. Economies that are

highly integrated into the supply chains of China, Mexico, Germany and Japan will

also get hurt. To get a better sense of the potential impact, we look at how much

third-country content is embedded in the exports of these countries

(Infographic, pages 6-7).

Figure 24: China accounts for nearly half of the US trade deficit

% of US trade deficit

Source: BBG, Standard Chartered Research

0% 5% 10% 45% 50%

China

Germany

Japan

Mexico

Ireland

Vietnam

Korea, South

Italy

India

Malaysia

Canada

Thailand

France

Taiwan

Indonesia

Venezuela

Switzerland

Saudi Arabia

Russia

Israel

Austria

Iraq

Sweden

Denmark

Bangladesh

Sub Saharan Africa

Mexico’s greater dependence on the

US makes it as susceptible to US

protectionism as China


11 April 2017 27

China, Mexico, Japan and Germany would suffer from direct tariff measures as well

as indirectly, as they are well-integrated into each other’s supply chains. Korea,

Taiwan, Malaysia and France supply intermediate products to these targeted

countries and would likely see knock-on impacts.

Some commodity producers such as Russia, Saudi Arabia and Australia could also

suffer, though it is arguably easier to find alternative buyers for commodities than for

more specialised parts and intermediate products. Our infographic (pages 6-7) drives

home the point that the US would lose out through greater protectionism,

strengthening our belief that an all-out trade war started by the US is unlikely to

materialise.

Some will gain

Tariffs imposed on particular products from a country open up the opportunity for

other countries to step up their exports of that product. This is exactly what happened

after the US imposed higher tariffs on certain passenger vehicle and light truck tires

from China in 2009. While tire imports from China fell, total tire imports by the US

rose in 2010 and 2011, reflecting the substitution of greater imports from other

countries for fewer Chinese tire imports (Hufbauer, 2012).

We look at the top five imports by the US from China, Mexico, Japan and

Germany and which other countries are supplying similar products to the US to

get a sense of who could benefit from tariff impositions (Figures 26-29) .

Mexico and China compete the most against each other on a wide variety of products

imported by the US and would stand to benefit if only one country were targeted.

However, in all likelihood, some protectionist measures will be imposed against both.

Canada, which has so far managed to keep out of the firing line, could benefit as a

result. A number of Asian countries also could step up direct supply of these

products, offsetting any losses resulting from lower intermediate goods exports

(through the supply chain). So Korea, Taiwan and Malaysia could ramp up direct

exports to the US. Other countries that would benefit include Vietnam, Thailand and

the Philippines. Interestingly, greater protectionism against Germany would give the

UK a chance to ramp up its trade with the US.

Figure 25: Mexico would be hit as much as China by US protectionism

Impact of protectionism on trading partner; % of country’s GDP

Source: BBG, WDI, Standard Chartered Research

0.0

0.5

1.0

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Korea, Taiwan and Malaysia could

also be hurt by measures against

China, Mexico, Germany and Japan

Vietnam, Thailand and the

Philippines could benefit from US

protectionism


11 April 2017 28

Figure 26: Top 5 US imports from China and the main countries that compete with China on these

% of US imports for that product

US imports from China

Telecommunications equipment

Office machines and ADP equipment

Miscellaneous manufactured articles

Electrical machinery, apparatus, appliances

Articles of apparel and clothing

Source: US Census Bureau, Standard Chartered Research

Figure 27: Top 5 US imports from Germany and the main countries that compete with Germany on these

% of US imports for that product

US imports from Germany

Motor vehicles Medicinal and pharmaceutical

General industrial machinery

Electrical machinery, apparatus, appliances

Power generating machinery


Figure 28: Top 5 US imports from Mexico and the main countries that compete with Mexico on these

% of US imports for this product

US imports from Mexico

Motor vehicles Electrical machinery, apparatus, appliances

Telecommunications equipment

Office machines and ADP equipment



Figure 29: Top 5 US imports from Japan and the main countries that compete with Japan on these

% of US imports for this product

US imports from Japan

Motor vehicles Electrical machinery, apparatus, appliances


Machinery specialised Power-generating machinery


-10% 0%

10% 20% 30% 40% 50% 60%

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11 April 2017 29

China’s response to greater US protectionism China seems to be the primary target for the Trump administration’s trade penalties.

We believe US-China trade frictions are inevitable given the size of bilateral trade

imbalances. China is likely to react to protectionist measures by imposing some of its

own measures on US exports to China (Figure 30).

America’s biggest companies, such as Boeing, Apple and Intel, use China as a

supplier, manufacturer and customer and could be China’s top targets in a US-China

trade war (Figure 31). China is also one of the biggest buyers of US agricultural

products. China will likely be quick to retaliate should Trump impose tariffs, either by

blocking US companies from market access or enacting a swift one-off depreciation

of the Chinese yuan (CNY) against the US dollar. The fastest-growing markets for

China’s products – for example, laptops and mobile phones – are in South Asia

(India), Africa and Latin America. China’s consumers bought 131mn iPhones in 2015;

total sales to US consumers during the same period were 110mn and iPhones

comprise only a small part of US exports.

A unilateral US tariff increase would deal a heavy blow to China’s trade and growth,

as could the introduction of a border adjustment tax (BAT), which would effectively

tax companies’ expenditure on imports into the US. The BAT is seen as a means of

reducing the US trade deficit without resorting to higher tariffs. In our view, the BAT

would most likely not comply with WTO rules and the US’ main trading partners,

including China, would likely file complaints with the WTO if such a tax were

introduced. China’s trade surplus would probably shrink substantially (see On the

Ground, 15 February 2017, ‘China - Bracing for a trade war, hoping for the best’).

To mitigate the fallout from a trade war and given China’s goal of achieving GDP

growth above 6.5%, China would likely respond by increasing stimulus to boost

domestic demand and tolerating a weaker currency.

The Trump administration may apply higher tariffs on specific products, especially

exports to the US that have grown rapidly in recent years. Swift retaliation from China

would likely ensue. China would likely impose higher tariffs on US goods and services,

primarily on agricultural products (15% of US exports to China) and vehicles and aircraft

(20% of US exports). China might also restrict US access to its fast-growing services

sector, which expanded 7.8% in 2016 and comprised almost 52% of China’s GDP.

Figure 30: Top US exports to China

USD bn, time period Dec 2015-Nov 2016

Figure 31: US companies most exposed to trade

hostilities with China (USD bn, % of revenue)

Source: Panjiva, Standard Chartered Research Source: Company reports of latest fiscal year, Standard Chartered Research

13.2 12.8

9.6

8.4

2.6

0

2

4

6

8

10

12

14

Airplanes and other aircraft

Soybeans Cars Electronic parts Nuclear reactors and

boilers

Total revenue in USD bn

China % of revenue

0

50

100

150

200

250

Apple General Motors Qualcomm Boeing Intel

Annual China sales in USD bn

Fastest-growing markets for

China’s products are in South Asia,

Africa and Latin America




11 April 2017 30

Trump’s trade agenda is focused on achieving two key objectives – narrowing trade

imbalances and creating jobs. Neither will be achieved by waging a trade war.

Retaliation would probably cause job losses and lower output for both countries. In a

broader context, trade competition with China is estimated to have cost 985,000

manufacturing jobs between 1999 and 2011, at a time when US manufacturing

employment fell by 5.8mn jobs (US Department of Commerce). The loss of

manufacturing jobs due to technological change, 4.8mn jobs, is significant compared

to job losses due to trade with China. Brookings estimates that protectionism could

lead to the loss of 4.8mn jobs in a full-blown trade-war scenario (Solis, 2016).

To avoid a protracted trade war, China might be willing to make some conciliatory

moves. To curb bilateral imbalances, China could open up its goods and services

market further, while the US might seek to lower its trade deficit by reducing China’s

import tariffs, subsidies to SOEs and opening up its services sector to foreign

competition.

Financial interdependence would also factor into the US’ decision whether to start a

trade war. China still has close to USD 3tn in FX reserves, mostly invested in dollar-

denominated assets such as US Treasuries. US reserves hover around USD 120bn.

Given that the Trump reflation story will likely add to the large fiscal deficit in the US,

it seems unlikely that the US will alienate China.

China has already started to reduce its reliance on the US market and to diversify its

trade towards emerging markets. US withdrawal from the TPP trade agreement has

given China the opportunity to strengthen its position in the region. Many countries

have already made it clear that they will push forward in negotiating their own trade

agreements, as economic benefits from the TPP would be significantly reduced

without US participation.

Australia was quick to extend an invitation to China to join the TPP in efforts to

salvage the agreement, but China seems keen to accelerate negotiations on its

RCEP initiative.

Figure 32: China’s exports by trading partners

Share of total exports, 2015

Figure 33: Which markets are most exposed if China gets

hit by US protectionism? (exports to China)

Source: Standard Chartered Research Source: IMF DOTS, IMF WEO, Standard Chartered Research

0 5 10 15 20

Taiwan

Russia

India

South Korea

Japan

ASEAN

Hong Kong

EU

US Exports as % of total

Exports as % of GDP

0

5

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20

25

30

35

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Trade competition with China is

estimated to have cost 985,000

manufacturing jobs between 1999

and 2011

Who can replace the US as a trade demand engine?


11 April 2017 32

Can anyone replace the US in world trade? US protectionism poses a more fundamental threat to world trade than just to the

immediate losers (or winners) from a more inward-looking US. Many countries

depend on trade for growth and development, and demand for goods produced by

these countries comes mainly from the US – the largest importer in the world. If the

US reduced its imports, who would replace it as a final demand destination? Demand

out of Europe is likely to remain weak amid political uncertainties and high debt

levels. China is focused on stabilising growth and encouraging domestic production

and consumption. So near-term, perhaps no one would be adversely affected.

Over the medium-term, however, China is likely to assume a greater role in final

demand and has already started to build its influence through higher investment into

and demand from the rest of the world through programmes such as One Belt, One

road (OBOR).

Figure 34: The EU continues to drive major trade deal negotiations globally

Source: European Commission, Standard Chartered Research

The state of EU trade

Preferential trade agreement being negotiated Potential for free trade partnership Stand - alone investment agreement being negotiated Preferential agreement in the process of modernisation

European Economic Area (Norway, Iceland, Liechtenstein) Preferential trade agreement in place (FTA, EPA, DCFTA) Preferential agreement awaiting adoption/ratification

EU & Customs union (Andorra, Monaco, San Marino, Turkey)

Few countries can replace the US in

the short run given geopolitical

concerns and high leverage


11 April 2017 33

EU: Bogged down by too many constraints

The European Union (EU) is the largest trading bloc in the world and given the size

of its economy and population, has the potential to replace the US as the final

demand destination for the rest of the world.

The rise of nationalist fringe parties, the difficulty in achieving EU-Canada trade deal

ratification, strong opposition from some quarters to TTIP and the shock Brexit vote

in the UK suggest that anti-trade sentiment is on the rise in Europe. However,

European governments and authorities continue to pursue trade deals, successfully

completing the EU-Canada and EU-South Korea trade agreements. Europe is also

involved in some of the key multilateral trade deals still being negotiated (Figure 34).

While there is some scope for improving demand from the EU, it is hard to see

Europe replacing the US as the driver of import demand from the rest of the world.

Many of the larger countries in Europe, including France, Spain and Italy, are still

heavily indebted and have little room for fiscal expansion on the scale that would be

required to boost such demand (Figures 35-36).

Geopolitical uncertainty including Brexit, and German, French and Italian elections

are also likely to subdue consumption and investment demand from the private

sector over the next two years. Over the longer term, demand is also likely to be

constrained by ageing populations and slowing growth in the absence of more direct

intervention through immigration policy or investment policy aimed at increasing

productivity and growth.

Germany accounts for around 45% of the EU trade surplus with the rest of the world

(Figure 37) and has been accused by President Trump and US Trade Secretary

Navarro of benefiting from trade through unfair means, in particular an artificially

weak exchange rate. In addition, there have been calls from the US for Germany to

take corrective action to reduce its large current account surplus (c.8.5% of GDP),

which would help to improve demand both for intra-EU trade and imports from the

rest of the world.

Figure 35: Euro-area member states debt-to-GDP levels

%, 2016

Figure 36: Germany has a fiscal surplus, Spain and

France have deficits (% of GDP, 2016)

Source: European Commission, Economic and Financial Affairs AMECO database Source: European Commission, Economic and Financial Affairs AMECO database

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European countries continue to

pursue trade deals but are unlikely

to replace lost US demand


11 April 2017 34

Germany has low indebtedness, and with a high current account surplus and near

fiscal balance: it has room to expand fiscal spending. Germany has loosened its

purse strings implicitly as it deals with the migrant crisis and is likely to increase its

spending on defence as part of its NATO pledge. However, given the constitutional

constraints on fiscal spending, it is unlikely to ramp up its weight as a final demand

destination. The onus is likely to fall increasingly on China and other Asian

economies to increase demand.

Figure 37: Germany accounts for most of the surplus of the EU trade balance

Net exports of goods and services at current prices (EUR bn), 2016

Note: country trade balance data includes intra-EU trade. Source: European Commission, Economic and Financial Affairs AMECO database

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strings but is unlikely to ramp up

fiscal spending significantly


11 April 2017 35

China – Rising driver of world trade demand

The new champion of free trade

China has grown to be the biggest contributor to world trade, now accounting for over

13.5% of world trade, second only to the European Union (Figure 38). The US share

of total world trade is just 9%. As the world’s mega-trader, China will have an

increasing interest in promoting free trade. However, momentum for free trade is at

risk of slowing. A trade spat between the US and China could have ripple effects

across the globe, even as China positions itself as the new champion of free trade.

Can China drive global trade higher?

China’s rise to be the second-biggest economy in the world has been partly driven by

its booming exports. China’s share of world trade rose to 13.7% in 2015 from 8.7% in

2007. More than half of China’s burgeoning trade is with Asia, accounting for 52% of

exports and 56% of imports. China is already the largest trade partner for almost all

Asian countries. However, China’s trade growth was on average 22.6% in the

decade since WTO accession in 2001. It slowed dramatically, to 6.0% in 2014,

turning negative in 2015.

Some slowdown is to be expected as China shifts from an investment and export-led

growth model to one focused on services and consumption. The contribution of net

exports to China’s growth has fallen significantly since the GFC. There has been no

contribution of net trade to overall growth since 2010. This, together with a sharp

reduction in China’s current account surplus and slower GDP growth over the past

few years has raised concerns about China’s ability to continue to drive global trade

higher. China’s exports fell as a share of GDP to 22% in 2015 from around 35% in

2007, while imports fell by a smaller 8ppt to 19% of GDP.

However, China continues to play an increasingly pivotal role in global supply chains.

China has increased its share of value-added to and from China at a rapid pace across

Asian economies, reflecting its absorption of other country’s exports and its move up

the value chain. The US and EU remain the largest final consumers of Asia’s products,

but the importance of China’s final demand for Asian exports has increased over the

past two decades (Figure 39). We expect this trend to continue over the medium term

as China moves towards a more consumption-based economy.

Figure 38: China – The biggest contributor to world trade

% share of world trade

Source: UNCTAD, Standard Chartered Research

China

US

EU

0

10

20

30

40

50

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

China’s share of world trade rose

to13.7% in 2015 from 8.7% in 2007


11 April 2017 36

It will be difficult for China’s trade to improve in 2017 due to the risk of greater

protectionist measures from the US, its biggest trading partner. However, China has

already started to reduce its reliance on the US market and to diversify trade towards

emerging-market economies.

TPP is off the table; can RCEP fill the gap?

President Trump has pulled the US out of the TPP, the 12-nation mega-free trade

deal that was a key plank of Obama’s ‘pivot to Asia’ trade policy. China, excluded

from the TPP, may benefit from US withdrawal from the TPP, moving to finalise its

own regional trade agreement, the Regional Comprehensive Economic Partnership

(RCEP). The RCEP is a free trade pact between ASEAN and six other Asia-Pacific

nations including China, Australia, New Zealand, Japan, Korea and India. It is now

poised to set the rules of the game in the region. From being a poor second choice

for most countries, the RCEP has now become the only game in town.

China continues to push for stronger integration and globalisation through its ‘One Belt,

One Road’ programme as well as the RCEP trade negotiations. Positive developments

on these negotiations will likely boost confidence and support investment and trade in

2017. We believe concluding RCEP is critical for supporting trade growth and deepening

supply chains in Asia amid rising protectionist sentiment (Figure 40).

Launched in November 2012, the RCEP has been under negotiation for three years.

The 17th round of negotiations began on 27 February in Japan, where services sector

liberalisation was in focus. With TPP off the table, the seven countries involved in

both TPP and RCEP negotiations will be more concerned about ensuring a strong

outcome from the RCEP.

The RCEP would mostly benefit the manufacturing sector by eliminating trade tariffs

within the Asian supply chain and simplifying rules governing preferential goods

trade. This should reduce some of the overlap among Asian FTAs and the risk of an

Asian ‘noodle bowl’ of multiple trade rules. The RCEP would account for about one-

third of global GDP (USD 22.6tn) and span countries home to about one-half of the

world’s population (about 3.5bn people). In comparison, the TPP (with the US

included) would span 37% of global GDP but cover only 11% of the world population.

Figure 39: China’s share of final demand for country’s exports is rising

Domestic value added in foreign final demand, partner shares (%)

Source: OECD TiVA database

To China

To Japan

To ASEAN-5

To US

To EU

To other

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995

late

st

1995

late

st

1995

late

st

1995

late

st

1995

late

st

1995

late

st

1995

late

st

1995

late

st

1995

late

st

1995

late

st

1995

late

st

1995

late

st

AU NZ JP CN KR MY TH PH ID SG IN HK

RCEP would account for about one-

third of global GDP (USD 22.6tn)


11 April 2017 37

Trade deals such as the RCEP are unlikely to fully substitute for the TPP as it is

much narrower in scope (Figure 42). The main aim of the RCEP agreement is to

lower tariffs among member countries, while the more ambitious TPP pact includes

provisions for foreign investment, public procurement, competition, state-owned

enterprises, intellectual property, regulatory coherence and transparency, labour and

the environment. Asian Development Bank (ADB) projections generated from a

general equilibrium model indicate that the RCEP provides global income benefits of

about USD 260bn (Petri, 2014). This pales in comparison to the projected income

benefits of USD 320-400bn from the TPP agreement. However, we expect that over

the coming years, the scope of the RCEP might be expanded or could be used as the

basis for deeper trade agreements in the region.

The RCEP, like other trade agreements, has shown slower progress than expected.

Involving countries in various stages of economic development, disagreements on

tariff reduction and China’s trade surplus with the rest of Asia seem to be sticking

points that need to be overcome. For instance, countries such as China want to see

more liberalisation in manufacturing, while other countries want to protect their

manufacturing sectors.

As many Asian countries now run significant deficits with China, they want to protect

their domestic industries from increased competition and hence are likely to show

strong resistance to tariff reduction.

While the RCEP negotiations have proceeded slowly, agreement may be reached by

end-2017 due to intensified negotiations, especially now that TPP seems to be off

the table.

Figure 40: China’s exports to Asia are rising

% of China’s exports to world

Figure 41: China’s exports slower, but still high

Average growth in exports of goods and services, %

Source: UNCTAD, Standard Chartered Research Source: CEIC, Standard Chartered Research

Figure 42: Importance of TPP and RCEP in global

economy (2015)

Figure 43: China: Asia’s biggest trading partner

% of total

Measure TPP RCEP

Magnitude Share of

world Magnitude

Share of world

Population 0.8bn 11.0% 3.5bn 47.7%

GDP current USD 27.5tn 37.3% USD 22.6tn 30.7%

GDP per capita USD 28,710 - USD 16,829 -

Trade (goods &

services exports, imports

USD 8.7tn 26.4% USD 9.3tn 28.1%

FDI inflow (2015) USD 593bn 34.0% USD 330bn 19.0%

Source: IMF, World Bank (WDI), IMF WEO, UNCTAD, Standard Chartered Research Source: CEIC, Standard Chartered Research

China to US

China to Asia (excl JP)

China to EU

0

5

10

15

20

25

1980 1985 1990 1995 2000 2005 2010 2015

Wor

ld

Chi

na

7.6 7.4

US

In

dia

Japa

n K

orea

G

erm

any

UK

0

2

4

6

8

10

12

14

16

18

20

1995-2002 2003-2008 2009-2013 2014F-2018F

US

CN

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

AU BG HK IN ID JP MY PH SG KO

Type your side comments here, no

full stop

Economies along the OBOR route

account for about 63% of the world

population and 29% of global GDP

ADB projections indicate that the

RCEP provides global income

benefits of about USD 260bn


11 April 2017 38

China – Expanding its influence

OBOR and the AIIB

The RCEP is not the only vehicle for expanding China’s influence in global trade.

The Asian Infrastructure Investment Bank (AIIB), which more than 50 countries

have joined; OBOR, an ambitious investment project inspired by the ancient Silk

Road; and securing the Renminbi’s inclusion in the IMF’s SDR basket, a step

towards challenging the global pre-eminence of the US, are seen as further

vehicles for expanding China’s influence globally. The OBOR and AIIB initiatives

are explained in detail in our August 2015 report, 'China - Investing USD 1tn along

'One Belt, One Road'.

Substantial headway has been made in the China-led OBOR initiative since its

implementation in 2013. China has reached cooperation agreements with over 30

countries along the OBOR route and six key trade corridors, with progress in

several focus areas including infrastructure connectivity, investment and trade

facilitation through Renminbi internationalisation and financial cooperation

(Figure 44). We expect much wider usage of the Renminbi in international trade,

investment and financial transactions due to the OBOR initiative. Economies

along the OBOR route account for about 63% of the world population and 29% of

global GDP.

The OBOR initiative has boosted trade and investment growth. Trade between

China and countries along the OBOR route exceeded USD 1tn in 2015, one-

quarter of China’s total trade value (Figure 45). The OBOR project may also

accelerate China’s shift from being the world’s biggest goods exporter to a major

capital exporter.

Also, China’s outbound direct investment (ODI) to countries along the OBOR has

grown rapidly in 2015-16 (Figure 46). We expect the initiative to boost cumulative

non-financial ODI to USD 2tn by 2020, from USD 938bn as of end-2015, assuming

annual growth of 20%.

Figure 44: OBOR infrastructure projects have started to take off

As of end-June 2016, infrastructure projects in the OBOR initiative

Type of infrastructure Project Start time

Railways China-Laos railway December 2015

China-Kyrgyzstan-Uzbekistan railway Restarted in January 2016

High-speed railway in Iran February 2016

Highways Highway in Pakistan (China-Pakistan Economic Corridor) May 2016

Ports Port city project in Sri Lanka Restarted in March 2016

Waterways international waterway project in Vietnam April 2016

Nuclear power plants Nuclear power plant in Pakistan March 2016

Hydro-power stations Hydropower station in Pakistan January 2016

Electric power plants Electric power plant in Mongolia May 2016

Airports International airport in Maldives April 2016

International airport in Nepal April 2016

Source: Media reports, Standard Chartered Research




11 April 2017 39

The AIIB, a multilateral development bank initiated by China, was created to fill the

financing gap in Asia’s infrastructure investment. Its main aim is to promote

sustainable growth in Asia by investing in infrastructure. Although Asia is the

fastest growing region in the world, infrastructure deficiencies have held back

development in many of its countries. According to our estimates, available funding

from AIIB could reach USD 150bn in 10 years. Through initiatives such as OBOR

and AIIB, China could significantly reduce infrastructure bottlenecks and promote

regional development. This should increase economic benefits to participating

countries and help China to build trust with its regional counterparts and expand its

influence in the region.

To mitigate the risks and overcome the implementation challenges of these

initiatives, China will likely seek to better align its strategy with other countries. It is

well on its way to achieving this with the RCEP agreement. US withdrawal from the

TPP has opened up an opportunity for China to assume a leadership role in the

region with many countries now looking to China to lead the way. The OBOR project

is set to result in greater diversification – China has indicated that India, Japan and

Russia could join the Silk Road too, and with ideas to expand OBOR to cover

countries in Africa, it seems an ideal platform for China to exert greater influence

over global trade.

Figure 45: China’s exports to OBOR countries have

continued to rise (exports by destination, % of total exports)

Figure 46: China’s outbound investment to OBOR

countries has grown strongly

China’s FDI and ODI, total and to OBOR countries, USD bn

Source: CEIC, Standard Chartered Research Source: CEIC, Standard Chartered Research

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EU

US`

OBOR

0

20

40

60

80

100

120

140

2014 2015 2014 2015

FDI ODI

OBOR

ADB estimates that Asia will need to

invest c.USD 8tn in infrastructure

over 2010-20

11 A

pril 2

017

40

Sp

ec

ial R

ep

ort –

Eco

no

mic

s: G

lob

al tra

de: T

rad

e firs

t! (Av

oid

ing

an

ow

n g

oa

l)

Figure 47: Mapping the One Belt, One Road initiative


KazakhstanUkraine

PolandGermany

Port of Rotterdam

4

Russia

5

5

4

Uzbekistan

Turkmenistan

IranIraq

Syria

Turkey

Mediterranean Sea

Saudi Arabia

Gwadar

Pakistan

Tibet

India

Malacca

Straits

KolkataDhaka

Mandalay

2 Myanmar

Thailand

Cambodia

Rizhao

Dalian

Lianyun

Shenyang

Changchun

Manzhouli

Harbin3

Mongolia

Inner

Mongolia

3

Lanzhou

6

Chita

Laos

Kunming

Bangladesh

Kazakhastan

HaikouSanya

QingdaoYantai

Zhoushan

Zhanjiang

Shanghai

Indian Ocean

Pacific

Ocean

Kashgar Xinjiang

Urumqi

1

Fuzhou

XiamenQuanzhou

Ningbo

South

China Sea

‘One Road’

‘One Belt’

Far East Russia

Liaoning

Armenia Azerbaijan

Belarus

Czech Republic

Egypt

Georgia

Hungary

Bilateral agreement countries

Kuwait

Maldives

Moldova

Nepal

Qatar

Romania

Serbia

Slovakia

Sri Lanka

Tajikistan

Bengal

Indonesia

Lithuania

Malaysia

Kyrgyzstan

Pakistan

UAE

1

2

3

Beijing

ShantouGuangzhou

Shenzhen

1

2

3

4

5

6

China – Pakistan Economic Corridor

Bangladesh – China – India – Myanmar (BCIM) Economic Corridor

China – Mongolia – Russia Economic Corridor

New Eurasian Bridge

China – Central and West Asia

China – Indochina Peninsula

Free Trade Zone

Port city

Bohai Rim Economic Zone

Yangtze River Economic Zone

Pearl River Delta Economic Zone

1

2

3

TianjinAlbania

Bosnia and Herzegovina

MontenegroMacedonia

Afghanistan

Philippines

Singapore

Brunei


11 April 2017 41

Appendix 1 – Country codes

Country Country Code

Angola AO

Argentina AR

Australia AU

Austria AT

Bangladesh BD

Belgium BE

Brazil BR

Canada CA

Chile CL

China CN

Colombia CO

Cyprus CY

Czech Republic CZ

Egypt EG

Finland FI

France FR

Germany DE

Ghana GH

Greece GR

Hong Kong HK

India IN

Indonesia ID

Italy IT

Japan JP

Kenya KE

Korea, Republic of (South Korea) KR

Malaysia MY

Mexico MX

Netherlands NL

New Zealand NZ

Nigeria NG

Pakistan PK

Peru PE

Philippines PH

Poland PL

Portugal PT

Russian Federation RU

Saudi Arabia SA

Singapore SG

Slovakia SK

South Africa ZA

Spain ES

Sri Lanka LK

Sweden SE

Switzerland CH

Taiwan, Province of China TW

Thailand TH

Turkey TR

Uganda UG

United Arab Emirates AE

United Kingdom GB

United States of America US

Venezuela VE

Vietnam VN


11 April 2017 42

References

Chung S and Joonhyung Lee et al., ‘Did China tire safeguard save US Workers?’

ERIA Discussion Paper Series, March 2015

Furman J and Katheryn Russ et al, ‘US tariffs are an arbitrary and regressive tax’,

VOX CEPR’s Policy Portal, January 2017

International Monetary Fund, ‘Global trade: What’s behind the slowdown?’ World

Economic Outlook, October 2016

Petri P, ‘New Directions in Asia-Pacific Economic Integration’, East-West Centre, 2014

Solis M, ‘The case for trade and the Trans-Pacific Partnership’, Brookings Institute

Policy Brief, October 2016

Tuerck D and Paul Bachman et al, ‘The Trump Tariffs: A Bad deal for Americans’,

NFAP Policy Brief, May 2016

Trade Partnership Worldwide LLC, Imports Work for America, pp. 17-26, May 2013


11 April 2017 43

Global Research Team

Management Team

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Head, Global Research

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11 April 2017 44

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11 April 2017 46

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Document approved by

David Mann

Chief Economist, Asia

Document is released at

01:49 GMT 11 April 2017

https://www.sc.com/in/india_result.html

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