Global Macro View: Four channels to gauge the hit from protectionism – There has been a lot of focus on the rising risk of protectionism recently, given the US administration’s tariffs on steel and aluminium and the threats of retaliation by other countries. The widening US trade deficit could spur the US administration on, though as discussed below, we think strong domestic demand is the primary cause. The looming risk of a trade war has clearly raised the downside risks to our above-consensus baseline for global economic growth this year. In terms of trying to assess this issue, we have been grappling with two questions. First, at what point does protectionism move from being a downside risk to being part of our baseline scenario? Second, how would we quantify the impact on global economic growth? Turning to the first question, we would incorporate a trade war into our baseline if other countries retaliate to the US steel and aluminium tariffs with tariffs on other goods and if there is a second round retaliation from the US (the President has signalled the possibility of targeting European car imports). As for quantifying these effects, this will not be straightforward. There is very little to go on in terms of protectionist measures in recent history. The Smoot-Hawley tariff in the US in 1930 was signed when the world economy was already entering the Great Depression, so the specific impact is difficult to discern.
Turning to the present day, we would look at four main channels to assess the potential economic impact. First, protectionist measures are a negative supply shock, in that they dampen economic growth and raise inflation. The extent of the direct effects depend crucially on the size of the sectors directly impacted. The aluminium and steel sectors are relatively modest in most economies, as is the size of the imports being discussed in terms of retaliation in macro terms. Second, there can be important indirect effects. There would be knock on effects on other sectors that rely on the commodities, which may face higher prices. In addition, the initial effects would be magnified, with adverse effects on suppliers to sectors directly impacted, and these effects would spread given global value supply chains. Third, there would likely be a tightening of financial conditions as markets price in not only the effects of the tariffs on global trade, but the real and rising risk of further escalation. Fourth, there could be a broader hit to business confidence. In terms of mitigating the effects, the current momentum in the global economy means that the starting point is relatively favourable. Meanwhile, the speed at which central banks react by following more accommodative policies could cushion the negative economic impact. This in turn would depend on the extent to which central banks are willing and able to look through higher inflation and focus on the economic growth implications. (Nick Kounis)
US Macro: Widening trade deficit a result of strong domestic demand – The US goods trade deficit was revised to a modestly larger $75.3bn in January, up from $74.4bn in the advance estimate. The deficit has deteriorated sharply over the past four months of available data, up from $64bn in September and breaking out of a multiyear range. The optics are not good in the current political climate, and will likely embolden trade protectionists in the Trump administration. However, the details suggest the deterioration is more a reflection of strong domestic demand and rising commodity (particularly oil – the US is still a modest net importer) prices rather than unfair competitive practices on the part of trading partners. Indeed, the biggest driver of the widening in the deficit is consumer goods, but while import growth in this category has been incredibly strong over the past four months, growing on average 6.0% yoy, consumer goods exports have also grown at a solid pace of 4.2% over the same period. This thesis is corroborated by data from the national accounts, which showed private consumption growing at 3.8%, and overall domestic demand at 4.5% qoq saar in Q4 2017 – the fastest pace since Q3 2014. With growth momentum continuing to build into 2018 – notwithstanding the downside risk of an escalation in trade tensions – the deficit is likely to widen further as the year progresses. (Bill Diviney)