- The mercurial US trade policy and the lack of a platform for countries and businesses to adjucate trade complaints, with the WTO court in disarray, is undermining trade and business confidence, even as costs rise alongside tariffs
Tariffs levied by the US and China on each other might be grabbing headlines, but other developments in international trade are worth watching, too. Trade will continue to shape the market outlook in the coming year and beyond. There are two clear channels through which trade tensions feed into markets: costs and confidence.
Raising tariffs increases the costs borne by importers, who either pass these along to consumers in the form of higher prices or accept lower margins. This has an effect on equity markets. Elevated margins are a key reason the US equity market has done so well in the aftermath of the global financial crisis.
Higher prices can also crimp activity in trade. Budgets are used up faster when prices are higher, so trade volumes often fall when tariffs rise, causing related activities such as trade financing and logistics to suffer. This effect is particularly pronounced in Hong Kong under the US-China trade dispute.
Costs are easy to identify and track. When the US announced a Section 301 investigation into France's digital services tax " a recent under-recognised disruption to global trade " and that tariffs could result, markets started to take higher costs into account. Notably, the US also used Section 301 of the 1974 Trade Act to investigate Chinese intellectual property practices, which led to tariffs on roughly US$350 billion of imports from China.
Confidence is a much bigger worry and more complicated. Uncertainty about trading relationships can cause businesses to cut investment. Business confidence, already dampened by the US-China trade war, will face more uncertainty next year.
For one, the US has threatened to reimpose tariffs on steel and aluminium imports from Brazil and Argentina. The tariffs, announced in early 2018, had been put aside after the US agreed to duty-free quotas from the two nations, limiting the quantity shipped to the US. Businesses had firmly moved the steel and aluminium issue off their list of worries for 2020.
The re-emergence of this threat adds another element of uncertainty to global trade. What other trade threats that we thought were in the past might creep back into the frame?
Underscoring these uncertainties are serious threats to the very system of global trade under which businesses operate. As of Wednesday, the World Trade Organisation Appellate Body ceased to function. This body has been hampered by the US refusal to confirm enough judges to the panel so it could meet the quorum necessary to rule on trade disputes among the WTO's 164 member countries.
The reasons for US intransigence on this matter and the practical next steps for the WTO have been covered extensively elsewhere, but CEOs and investors have not paid enough attention to this issue.
The ability to trade is one of the basic mechanics of business operations. When disputes can no longer be brought to a world trade court to be resolved, countries' ability to make sure trade is carried out by the rules enshrined in various bilateral agreements is hamstrung.
When trade threats are apparently never really off the table and businesses lack a venue to adjudicate their complaints, confidence takes a hit. The unpredictability of US trade policy and a neutered WTO add up to another source of unease for markets next year.
We have already seen hits to confidence constrain investment and activity this year. With no easy resolution in sight for these trade issues, expect them to continue to drag on business confidence in 2020.
Hannah Anderson is a global market strategist at JP Morgan Asset Management
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