The trade war is starting to hurt. Figures last week from the Dutch statistics agency CPB showed that the volume of world trade has grown by only 0.3 per cent in the past six months, which is less than one-tenth of the average growth we saw in the 17 years before the financial crisis. And official figures next week could show that industrial production has fallen in the eurozone in the past three months. And all this is before the latest round of US tariff rises on Chinese goods took effect.
Granted, this year’s tariff rises apply to only a small fraction of total goods – although they do now cover half of Chinese exports to the US. Their impact, however, is disproportionate to their coverage, for two reasons.
One is that there are knock-on effects onto third parties. Insofar as US tariffs do depress Chinese exports, they’ll cause Chinese manufacturers to spend less on materials, parts and capital goods – many of the latter of which come from Europe. This is one reason why commodity prices, despite their rise in the last month, have fallen since May.
The other is that the trade war creates uncertainty about how far it will continue – an uncertainty fuelled by President Donald Trump’s threat to raise tariffs on EU cars. Scott Baker, Nick Bloom and Steven Davis, three US economists, measure this. Their index of global economic policy uncertainty is now almost two standard deviations above its 20-year average.
This matters. Exports require investment – not just in capacity but in marketing effort and in ensuring that your goods meet overseas regulations. And we know that uncertainty depresses investment, if only because companies delay investment plans in the hope that uncertainty will lift.
Granted, the evidence so far is that only a minority of companies are delaying investment for this reason (which is only natural because only a minority of companies export at all). And in the US – but not Europe or China – this delay is outweighed by the strength of the general economic upswing. Nevertheless, there is only downside here, and no upside.
Nor, of course, is the trade war the only thing restraining global trade. In fact, world trade growth was weak long before President Trump took office for a variety of reasons such as: companies’ recognising that long supply chains are difficult to manage; the growth in the services economy at the expense of goods; uncertainty about the future availability of finance; and rising wages in China. The trade war is just one more obstacle to growth.
Altogether, though, this combination is a toxic one. Slower growth in world trade betokens a slowdown in the progress of the international division of labour. And this matters enormously because as Adam Smith said, "the greatest improvement in the productive power of labour... seem to have been the effects of the division of labour". It’s no accident at all that the slowdown in world trade growth since the crisis has coincided with a slowdown in productivity growth in developed economies. And because productivity growth is the main determinant in the long run of real incomes, the trade war – plus the many other reasons for slow trade growth – is a threat to all our living standards.
