Wed | Aug 22, 2018

Editorial | A dangerous dance of elephants

Published:Sunday | July 22, 2018 | 12:00 AM

At their Montego Bay summit this month, Caribbean Community (CARICOM) leaders, without calling names, lamented the global trade war initiated by Donald Trump, America's capricious president, and how destabilising such fights can be to developing economies like their own.

But apart from declaring their support for "an inclusive, rules-based and transparent trading system under the WTO (World Trade Organisation)", they said nothing about what they intended to do about it. At least, none that was apparent in their final communique. It said nothing about instructions they may have given their trade ministers.

That, of course, is surprising on several fronts, not least for the fact that this was the summit which was to jump-start the stalled initiative to transform the Community's customs union into a genuine single market and economy, which implies a deep integration of policies. Perchance it was an oversight on the part of the leaders. It is urgent, this newspaper believes, that they start thinking, and planning, seriously about how to coordinate efforts to cushion the fallout from Mr Trump's incitement and its potentially dangerous consequences for the world economy.

In this regard, Jamaica, which has oversight in CARICOM for international trade negotiations, ought to take the lead. In any event, it should, on its own account, and out of self-interest, having expended difficult and painful efforts at stabilising its economy, be mapping strategies to insulate itself against the likely perils.

The point is, the situation appears to be growing worse rather than better. The proximate cause for the crisis is Mr Trump's belief that multilateral trade partnerships, such as NAFTA, in which the United States has membership, and the global trade rules, as policed by the WTO, are serving to de-industrialise America. He sees evidence in the US$566-billion deficit on visible trade that America ran with the world last year, and especially in the US$375 billion more it imported than exported to China. Moreover, Mr Trump believes China cheats in trade and business relations with America.

 

WORTH BILLIONS

 

In March, he imposed a 25 per cent tariff on aluminium and steel imports, which, while it impacted China, hit other countries, like Canada, Germany and Japan, and India harder. More recently, Mr Trump instituted a 10 per cent tariff on US$34 billion worth of Chinese imports, is soon to add US$16 billion to that amount, while having another US$200 billion worth of Chinese exports in his sights.

China has thus far responded tit-for-tat to Mr Trump's opening salvo and has suggested that while it is willing to settle the dispute, it will retaliate against any further actions by the Americans. On the face of it, given that China imports only around $130 billion from America, Beijing won't have the import value in goods for a dollar-for-dollar retaliation against the Americans. That, however, doesn't mean that the Chinese are without options.

Over the last month or so, China's currency, the yuan, has depreciated, or has been allowed to, by more than four per cent. It might fall further. The upshot: Chinese goods will be cheaper to foreigners, including Americans, while foreign products will be more expensive to Chinese. In other words, China could well be able to offset some of the effect of higher US tariffs while hurting US exporters. China, with its more than US$3 trillion in reserves, much of it invested in US bonds, could also pull other levers that negatively affect America.

The effect of the initially imposed US tariffs would, experts say, reduce Chinese growth by one-tenth of one per cent, but a long-term trade war, including a deep depreciation of the yuan, could cause uncertainty, leading to capital flight and a disruption of markets, thus undermining long-term growth.

This dance of the elephants, as Kamina Johnson Smith, Jamaica's foreign affairs and foreign trade minister, termed the imposition of aluminium and steel tariffs, is already roiling markets and could cause global tremors if their stomping becomes heavy and an artless, disruptive conga line. Caribbean countries haven't yet recovered from the Great Recession of 2008.

Of that, there was no advanced warning. This time, Mr Trump gave an early signal and is now rattling the pillars of the world economy. The region, and Jamaica, in so far as is possible, should be erecting their defences, including talking regularly and loudly about the folly of this behaviour.