The Chief Economist’s Note

Beware the dangers of over-interpreting better news on trade

This year has been a pretty gloomy one for the world economy, but the final few weeks have brought some better news. The latest survey data suggest that the slowdown in global growth is bottoming out, equity markets have rallied, and, perhaps most significantly, some of the gloom around global trade is starting to lift.

The improvement in the mood over trade has been helped by positive noises from both Beijing and Washington about the prospects of agreeing a so-called “phase one” trade deal. At the time of writing, it’s unclear what exactly any such deal would cover. But it seems likely that it would involve Beijing agreeing to increase purchases of some agricultural products from the US in return for Washington agreeing to postpone tariff hikes that are scheduled to take place later this month, and perhaps rolling back some of the hikes that took place in September. While it remains to be seen how events will play out, it’s fair to say that there appears to be a growing commitment at the highest levels of government on both sides to agreeing some form of deal.

At the same time, it’s worth noting that the headlines from the actual trade data are likely to improve as the big falls in the year-on-year growth rate of global trade seen over the past 12 months or so start to ease. Taken together, these developments could feed a narrative in markets that the global economy is on the mend and that the world has stepped back from the brink of protectionism.

In practice, there’s rather less to all this than meets the eye. For a start, even if a “phase one” deal is agreed, it is unlikely to represent a major breakthrough. Tariffs on US imports from China would still be far higher than before the trade war started. The average US tariff on imports from China has risen from 3% at the start of 2018 to 21% today. Even a full rollback of September’s tariffs would only take it back to 18%. (See Chart 1.)

Chart 1: Average tariff rates on US imports from China (%)

Average tariff rates on US imports from China (%)

Of course, lower tariffs are still a positive development, particularly if they set us on a course towards a further easing of tensions and rollback of tariffs. But the fact that both sides have had to resort to a “phase one” deal in the first place underlines just how difficult it is proving to address more fundamental issues such as industrial policy, technology and intellectual property that will form part of “phase two”. The trade war isn’t ending, it’s merely shifting away from a narrow focus on tariffs and towards broader issues around technology, investment, industrial strategy and security.

Meanwhile, there is a risk that the likely improvement in the trade data over the coming months is misinterpreted too. By convention, most analysis of trade focuses on year-on-year growth rates. These collapsed into negative territory late last year following a sharp drop in monthly trade volumes in November and December. (See Chart 2.) Global trade volumes have been broadly stable since, but the steep falls in the final few months of last year have kept the year-on-year growth rate in negative territory throughout this year. This has contributed to concerns about the health of the global economy and muddied much of the commentary around the effects of the US-China trade war.

Chart 2: World Trade Volumes (Jan. 2019 = 100)

The base effects from the steep falls in trade at the end of last year are now about to drop out of the annual comparison. As a result, the year-on-year rate of trade growth, which tends to get most attention in the markets and the media, is likely to flip from being strongly negative to broadly flat. Yet this is a statistical illusion – it doesn’t reflect a recent improvement in month-to-month trade flows.

The reality is that, while global trade volumes have bumped around from month-to-month over the past couple of quarters, they are broadly unchanged from the end of last year. In other words, global trade has been stagnant for much of this year.

Looking ahead, we expect the slowdown in global growth to bottom out around Q1 of next year and to then recover over the course of 2020. Trade is likely to follow a similar trend. But this comes with two qualifications. The first is that the pace of recovery will be extremely weak by past standards. Our growth forecasts for most countries remain below consensus. And the second is that the pattern of recovery will be uneven – the recovery in the US is likely to outpace that of the euro-zone, while China’s economy is likely to slow. I’ll have more to say about this in notes over the coming weeks. For now, the key message is to be careful not to over-interpret the better news on trade and activity.

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