Unfortunately, large swaths of the electorate in western democracies persist in the idea that deglobalization is feasible, and that fantasy continues to bleed expectations for global growth and trade.
Note that we used the word “feasible” as opposed to “desirable”. It’s often easier to make a point when you strip away pretensions to normative judgment and couch things in more concrete terms.
We’ve long argued (and we’re hardly alone), that the main problem with economic nationalism and related attempts to roll back globalization by severing interconnected supply chains and erecting trade barriers isn’t so much that it’s “wrong”. Rather, the problem is that it’s impossible.
There is a reason why markets are so fixated on trade tensions and why the seemingly intractable Sino-US dispute has weighed so heavily on sentiment.
This is perhaps the most dramatic example of trying to put the proverbial genie back in the bottle the world has ever seen. When it comes to globalized supply chains and interconnected markets (both financial and otherwise), the horse hasn’t just left the barn, it has run clear through the field, jumped the gate and galloped out into the countryside, never to be seen again.
Understood in those very simple terms, the entire effort to roll back the clock can be understood for the farcical tragicomedy that it is. You needn’t even make a judgement as to the relative “rightness” or “wrongness” of it, because it simply cannot work.
Well, speaking of things that cannot work, to the extent monetary policy was already doomed to be pushing on a string in subsequent rounds of easing, the trade situation is set to ensure it fails.
“Today’s QE faces [a] daunting headwind: trade uncertainty”, BofA’s Barnaby Martin writes, in a new note.
He goes on to remind market participants that global trade volumes “are now contracting at their fastest rate since late 2009 (-1.4% YoY)” and, worryingly, this is unfolding at a time when world GDP growth is still positive. That’s a relative rarity over the last two decades.
“For much of the post-2000 period, it was the norm for world trade growth to be in excess of world GDP growth”, Martin goes on to say, adding that “populist politics – in the form of tariffs – have begun to drive a generational change in attitudes towards ‘globalization'”.
BofA cites the ongoing collapse in South Korean exports, which fell for a 10th consecutive month in September. The country – along with other regional “canaries” – is a global demand bellwether, and the last six months have been rough, to say the least.
“If the latest South Korean export numbers are anything to go by, then global trade volumes are unlikely to bounce back anytime soon, in our view”, Martin warns.
The bottom line is that monetary policy was already constrained by the fact that policymakers are confronting a new growth scare with limited ammunition, as rates are, at best, just off the lower bound and, at worst, still mired in NIRP. Balance sheets, meanwhile, are still bloated.
Although populist politics, to the extent it manifests itself in fiscal stimulus, can assist monetary policy in the effort to avert a downturn, the same populist platforms are contributing to the trade uncertainty and deglobalization push that’s in part to blame for the downturn. What populism “taketh away” with deglobalization it tries to “giveth back” with fiscal stimulus – clearly, that’s absurd.
Trade uncertainty for advanced economies sits at a record high. If the last two weeks’ developments (i.e., reports that the Trump administration is considering a variety of proposals to limit capital flows to China and the imposition of new US tariffs on the EU in connection to the Boeing-Airbus dispute) are any indication, it will probably remain elevated both for DMs and emerging economies for the foreseeable future.
Of course, you shouldn’t ever completely count out the benefactors with the printing presses.
“Amid the age-old battle between technicals and fundamentals, we think it’s still too soon to write off the power of financial repression”, BofA’s Martin writes, in the context of how credit spreads will likely react to the tug-of-war between more QE in Europe and deteriorating macro.
“Yet, the broader ‘deglobalization’ we see at play is a concern”, he adds, noting that “global trade is Europe’s Achilles heel”.
Really, though, trade is everyone’s “Achilles heel” in a globalized world.
Nobody wins in an all-out trade war. And while not every nation will suffer the same, the collateral damage from cascading escalations between the US, the EU and China, will be widespread indeed.