Higher global tariffs and higher uncertainty have caused global trade growth to slow down to 1.5% in 2019, the slowest in a decade, according to a report by trade credit insurer Euler Hermes.
The report, titled ‘Trade Wars: May the Trade Force be with you in 2020 and beyond’, outlined that the global conditions and slow growth will likely cause exporters to lose around US$420 billion in losses this year. China is projected to sustain US$67 billion in losses, with Germany (US$62 billion) and Hong Kong (US$50 billion) following it.
While most of this can be attributed to currency effects, the export shock has clearly been widespread across European countries and export hubs, the report said. Among sectors, electronics (US$212 billion), metals (US$186 billion) and energy (US$183 billion) are likely to suffer the most losses in 2019.
While the worst is already over, significant improvement in conditions are unlikely in 2020.
“Our proprietary Trade Momentum Index shows that the worst is behind us: It has stopped deteriorating, albeit still remaining negative. In 2020, we hence expect trade to remain in a low-growth regime, slightly accelerating to +1.7%, while global economic growth continues to decelerate to +2.4% after +2.5% in 2019,” said Ludovic Subran, group chief economist at Allianz and Euler Hermes.
“The so-called ‘phase 1’ deal between the US and China, despite being superficial, may bring some comfort. But renewed threats of tariffs and a busy political year (global summits, US elections) in 2020 should bring higher volatility, leaving no hope for sizable improvement going forward,” Subran added.
While China and the US are expected to make the biggest recovery in 2020, the trade war has already taken its toll: export gains for both countries will be roughly half of what they were in 2018. Rising protectionism in the form of US tariffs on cars may target Germany and the UK next, the report said.
On a brighter note, the software and IT services sector is expected to grow moderately at US$62 billion, followed by food and agriculture (US$41 billion) and chemicals (US$37 billion).
Businesses employing new strategies
Amid escalating US-China trade tensions, small and agile exporters have benefited the most from trade diversion, the report said. In other words, the largest trade partners are losing market share or gaining less than average (Canada, Germany, Japan, and Mexico), while many of the smallest trade partners (Taiwan, the Netherlands, and France) are rapidly gaining.
Meanwhile, phantom trade is the other consequence of the trade tensions – some Chinese companies could be shipping their merchandise to third markets, such as Taiwan and Japan, then off to the US, avoiding tariffs in doing so, the report said.
“This rerouting avoids tariffs and artificially inflates trade figures (because the same good travels to an additional market before reaching the final partner). Our preliminary analysis on South East Asia, with not more than a year and a half of data, shows that Japan and Taiwan are used as rebound markets for machinery & mechanical appliances, and for electrical machinery,” said Georges Dib, economist at Euler Hermes.
Furthermore, the US will probably turn its trade policy focus to Europe as US President Donald Trump has criticised the ECB policy, Germany, and the EU overall several times. In six months, Trump could announce a 10% tariff on imported European cars in the absence of noticeable progress on the US-Europe trade deal. This could hinder the EU’s growth by -0.1 percentage point, with Germany hit the hardest in terms of export losses and given the weakness of its automotive sector. Aggregate export losses for the EU could be around €4 billion per year, the report said.