Global economy poised to feel pain of trade war

Impact of US-China tariff spat likely to hit businesses in 2019, slowing growth in turn

Financial markets have already taken a hit. China's stock market has lost US$2 trillion (S$2.7 trillion) in value in 2018 and is languishing in a bear market. PHOTO: AFP

HONG KONG • While 2018 was the year trade wars broke out, 2019 will be the year the global economy feels the pain.

Bloomberg's Global Trade Tracker is softening amid a fading rush to front-load export orders ahead of threatened tariffs. And volumes are tipped to slow further even as the US and China seek to resolve their trade spat, with firms warning of ongoing disruption.

Already there are casualties. GoPro will move most of its US-bound camera production out of China by next summer, becoming one of the first brand-name electronics makers to take such action, while FedEx recently slashed its profit forecast and pared international air-freight capacity.

"Any kind of interference with commerce is going to be a tax on the economy," said Mr Hamid Moghadam, CEO of San Francisco-based Prologis, which owns almost 4,000 logistics facilities globally. "And the world economy is probably going to slow down as a result of it."

Financial markets have already taken a hit. Bank of America Merrill Lynch estimates that the trade war news has accounted for a net drop of 6 per cent in the S&P 500 this year. China's stock market has lost US$2 trillion (S$2.7 trillion) in value in 2018 and is languishing in a bear market.

Recent data underscores concerns that trade will be a drag on American growth next year.

US consumers are feeling the least optimistic about the future economy in a year, while small business optimism about economic improvement fell to a two-year low and companies expect smaller profit gains.

The International Monetary Fund forecasts trade volumes will slow to 4 per cent in 2019 from 4.2 per cent this year and 5.2 per cent in 2017. It warns that trade barriers have become more pronounced.

Europe is not insulated either. While Germany's key machinery sector will produce a record €228 billion (S$357 billion) this year, the trade disputes are among reasons why growth will slow, according to the VDMA industry association.

Output will increase about 5 per cent in real terms in 2018, the most since 2011, before growth slows to 2 per cent next year.

Then there is the risk of the US placing tariffs on auto imports from Europe and Japan, which would damage relations between some of the world's biggest economies. The arrest of Huawei Technologies' chief financial officer Meng Wanzhou illustrates the risk of unexpected developments that can inflame already tense relations.

The critical question is whether Washington and Beijing can strike a deal by the March 1 deadline. If they succeed, a cloud will be lifted off the world economy. But for now, the threat that tensions will linger is a brake on business expansion plans, and thereby the global economy.

Dippin' Dots is among those caught in the crossfire. The US-based maker of ice cream and other frozen products spent three years breaking into the Chinese market and opened its first stores in the country this year, only to pay double-digit tariffs on imported dairy products. CEO Scott Fischer said if the US-China talks fail and extra tariffs are added, he would be forced to rethink strategy and supply chains.

"From an entrepreneur's perspective, our question is how long will this continue?" he said. "It's hard to plan business in this environment."

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A version of this article appeared in the print edition of The Straits Times on December 27, 2018, with the headline Global economy poised to feel pain of trade war. Subscribe