No Let-up in the War On Trade

Now would be a good time to attempt a truce in the war on trade being waged by the world's major economies, because even as world trade contracts, the legal restrictions designed to strangle it continue to proliferate. Right now, the weight/cost of non-tariff barriers (NTBs) per dollar of imports is the worst since the beginning of the century. This is no way to help the global economy recover from coronavirus.

The war on trade is unrelenting: during March to June, when the short and long-term damage to the world economy to be expected from the coronavirus is the major subject of economic speculation, the US, EU, China and Japan added a further 74 non-tariff barriers to discourage trade. The US added 24, Japan added 24, China added 14, and EU added 12. This took their total at end-June to 8,175, according to the WTO database - 8,175 different ways to stop imports.

The idea of 'automatic stabilizers' is familiar in economics: for example, when economic activity falls in a recession, so tax receipts also lag, which in turn results in a deterioration in the government's fiscal position, which helps offset the fall in private demand.

Non-tariff barriers, however, are 'automatic de-stabilizers', in the sense that as trade volumes lag, so the burden they exert on marginal trade gains rises.

Trade volumes slowed during the 12m to 1Q, with US$ imports by US, EU, China and Japan falling 1.2% qoq and falling 3.5% yoy. We do not yet have the full data for 2Q, but that modest fall was followed by something like collapse in 2Q. On the data and trends up to May, we should expect these imports to have fallen at least 4.8% qoq and have fallen at least 7.7% yoy in the 12m to June.

Since non-tariff barriers erected during the same period rose 0.9% qoq and rose 3.8% yoy, their impact on the surviving imports, and also the trade likely to accompany global recovery, has risen.

One can measure this by looking at the number of NTBs per billion dollar of monthly imports. Prior to the GFC of 2008/09, this bottomed out at 7.6 NTBs per billion. Subsequently it has tended to rise, hitting a peak of 13.4 in the peak of the unacknowledged industrial recession of 2016. But 2Q is setting new records, rising to 13.6 NTBs per billion. (And more if my forecasts of the fall in 2Q imports is found to be conservative - as I expect).

Because the tangle of NTBs is less visible, and less reported, than actual import tariffs, they tend to be ignored. What is visible looks encouraging enough: average tariffs are lows, in 2018 they stood at 3.4% for the US 3.4%, 5.1% for EU 5.1%, 10% for China and 4.7% for Japan 4.7% But this only advertizes that tariffs are not where the war is being waged. Having a record number of overt but usually invisible trade restrictions in place as the world economy tries to recovery from the coronavirus lockdowns is surely not helpful. Time for a truce in the War on Trade?