By Karen Lynch
Recent analyses from the International Chamber of Commerce (ICC), World Economic Forum,2 United Nations Conference on Trade and Development (UNCTAD),3 global banks,4 and others5 point to several factors behind this trend, including protectionism, market uncertainty, slower global economic growth, tightening financial conditions, and technological alternatives to off-shoring production. Implications for companies include changes in supply chains, markets served, competitive dynamics, pricing, growth, and profitability, according to their analyses.
In the Commerce Department report, U.S. exports of goods and services were down 1.9 percent and imports up 2.1 percent in the month of December.6 For all of 2018, U.S. exports were up 6 percent and imports up 7 percent over 2017.7
Worldwide, there was also a sharp drop-off in trade growth, from over 5 percent at the beginning of 2018 to nearly zero at the end of the year, according to IHS Markit, a market research firm.8 And what a difference a year makes. In 2017, global trade growth surpassed expectations amid a general economic recovery across regions, so policymakers finally declared that international trade had recovered from the global financial crisis. But the trade growth picture clouded in 2018, in part because of tensions among major trading nations and the protectionist measures they enacted.
For 2019, the World Trade Organization (WTO) has downgraded its original forecast for global merchandise trade growth, to 3.7 percent from 3.9 percent, adding that “these estimates could be revised downward if trade conditions continue to deteriorate.”9 The current forecast of 3.7 percent annual growth is down from 4.7 percent in 2017 and also down from the average annual global trade growth of 4.8 percent since 1990.
Recent changes in world trade have prompted extensive analysis of the implications for companies’ supply chains and export markets. Here are several insights from a range of observers:
Seventy-nine percent of U.S. companies are confident of success in the current trading environment, just below the global average of 81 percent, according to a survey by HSBC. But they are shifting strategies. More U.S. companies plan to trade within their home region in the next three to five years (up 5 percentage points from early 2018 to 38 percent in late 2018), according to HSBC. In fact, companies worldwide are turning their attention to intra-regional trading rather than growing their trade more globally. In another example, fewer North American companies cite Asia as a top target for future trade growth (only 15 percent, down from 33 percent).10
Developing and executing trade strategy is a challenge in the current environment. More than half (52.6%) of North American manufacturers cited trade uncertainties as a primary business challenge in a recent survey by the National Association of Manufacturers.11 For one thing, “fluctuating tariffs … create uncertainty about future trade policy, which in turn makes traders more reluctant to sell to new markets,” according to the ICC’s analysis. Furthermore, some companies have hesitated to overhaul their current international trade arrangements and unwind investments because of uncertainty—not knowing whether recent tariffs will stick or where the next tariff might appear, according to UNCTAD.12
“It is difficult to overstate the extensive corporate reorganization that a return to higher tariff levels would require,” according to the ICC. “Some investments would have to be written off. Innovation strategies, which can now involve multiple partners, would have to be rethought.” This is another reason that, even in the face of tariff increases, some companies will keep at least some production in affected countries—either accepting lower profits or passing on increased costs to consumers, the ICC analysis said.13
Three out of five U.S. small and midsize enterprises (SMEs) worry that U.S. import tariffs will have a negative impact on business, according to the FedEx Trade Index. Sixty-seven percent of them think such tariffs will result in higher prices on consumer items.14 Business risks from rising international trade tariffs and non-tariff measures generally include costlier imports, less competitive exports, fluctuating foreign exchange rates, shorter contracts, canceled orders, reduced consumer demand, and slower customs procedures.
SMEs worldwide have been among the beneficiaries as the acceleration of globalization, which began when China joined the WTO in 2001, has supported the growth of large multinational companies that have been able to offshore production processes and tap more suppliers, according to Jaime Malet, Chairman of the American Chamber of Commerce in Spain. “International trade of goods based on offshore manufacturing will obviously continue to exist, but it will tend to decline below world GDP growth,” he wrote recently. Among other factors, “technological development is bringing production and manufacturing closer to the final destination of goods—the end user.”15
Some companies are also looking to “re-shore” production to avoid tariffs. Even before recent tariff increases, some were setting up production in secondary countries to achieve lower costs and other strategic benefits. “In response to tariffs, the pace of this reorientation is likely to increase ... but this is a more costly and complex process than many imagine,” according to an analysis by the ICC, citing such factors as unclear investment laws in many countries.16
Overseas, tariffs “affect firms’ ability to export to new and existing markets, hurting corporate profitability and growth,” the ICC said. In addition to facing tariffs imposed by other countries, U.S. companies can face another important consequence of U.S. import restrictions: “Tariffs on imported components and capital equipment effectively act as a tax on exports because the competitiveness of downstream buyers is adversely affected.”17
“Bilateral tariffs alter global competitiveness to the advantage of firms operating in countries not directly affected by them,” according to UNCTAD. “This will be reflected in import and export patterns around the globe.”18 Domestically, protected companies and industries may gain an advantage from import tariffs, but the manufacturers that use their materials as inputs may suffer, the ICC analysis said. Ultimately, “This reorientation of a nation’s resources toward protected sectors, including inefficient firms, rather than toward the most efficient or innovative sectors, hurts overall productivity growth,” it said.19
How worried should international traders be? Everything’s relative, according to ABN AMRO Chief Economist Han de Jong. 2017 was a year of sharply accelerated global trade growth after years of sluggish performance—perhaps simply reflecting the inventory cycle and pent-up demand following a slowdown in 2014-2015. “Periods of above-trend growth are bound to be followed by periods of below-trend growth,” de Jong said. “This is normal and nothing to be particularly worried about.” That said, de Jong, like others, included the proviso that unpredictable trade policy decisions could cause slower global trade growth than anticipated.20
Growth of global trade is slowing, by most official measures, and the implications for businesses are coming to light. The coming year could determine the extent of the slowdown and requirements for businesses to re-strategize to preserve their growth and prosperity.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
1. “U.S. International Trade in Goods and Services, December 2018,” Bureau of Economic Analysis; https://www.bea.gov/news/2019/us-international-trade-goods-and-services-december-2018
2. “International Trade is Slowing. What Does This Mean for Globalization?” World Economic Forum; https://www.weforum.org/agenda/2017/11/international-trade-is-slowing-what-does-this-mean-for-globalization/
3. Key Statistics and Trends in Trade Policy 2018, United Nations Conference on Trade and Development; https://unctad.org/en/Pages/PressRelease.aspx?OriginalVersionID=500
4. “Global Outlook 2019: Slower, But Continued Growth,” ABN-AMRO; https://insights.abnamro.nl/en/2018/11/global-outlook-2019-slower-but-continued-growth/
5. “10 Predictions for the Global Economy in 2019,” World Economic Forum; https://www.weforum.org/agenda/2019/01/what-to-expect-for-the-global-economy-in-2019/
6. “U.S. International Trade in Goods and Services, December 2018,” Bureau of Economic Analysis; https://www.bea.gov/news/2019/us-international-trade-goods-and-services-december-2018
8. “10 Predictions for the Global Economy in 2019,” World Economic Forum; https://www.weforum.org/agenda/2019/01/what-to-expect-for-the-global-economy-in-2019/
9. “WTO Trade Indicator Points to Slower Trade Growth into First Quarter of 2019,” World Trade Organization; https://www.wto.org/english/news_e/news19_e/wtoi_19feb19_e.htm
10. “Businesses Alter Course as Political Headwinds Threaten Global Trade,” HSBC; https://www.hsbc.com/media/media-releases/2018/businesses-alter-course-as-political-headwinds-threaten-global-trade
11. “NAM Manufacturers’ Outlook Survey,” National Association of Manufacturers; https://www.nam.org/uploadedFiles/NAM/Site_Content/Data-and-Reports/Manufacturers_Outlook_Survey/Q1%202019%20Outlook%20page%20text.pdf
12. Key Statistics and Trends in Trade Policy 2018, United Nations Conference on Trade and Development; https://unctad.org/en/Pages/PressRelease.aspx?OriginalVersionID=500
13. Key Statistics and Trends in Trade Policy 2018, United Nations Conference on Trade and Development; https://unctad.org/en/Pages/PressRelease.aspx?OriginalVersionID=500
14. “FedEx Trade Index,” FedEx; https://about.van.fedex.com/wp-content/uploads/2018/08/FedEx-SME-Trade-Index-Summer-2018.pdf
15. “International Trade is Slowing. What Does This Mean for Globalization?” World Economic Forum; https://www.weforum.org/agenda/2017/11/international-trade-is-slowing-what-does-this-mean-for-globalization/
16. Aftershock: The Pervasive Effects of Tariff Hikes, International Chamber of Commerce; https://iccwbo.org/publication/aftershock-pervasive-effects-tariff-hikes/
18. “Trade Wars: The Pain and the Gain,” United Nations Conference on Trade and Development; https://unctad.org/en/Pages/PressRelease.aspx?OriginalVersionID=500
19. Aftershock: The Pervasive Effects of Tariff Hikes, International Chamber of Commerce; https://iccwbo.org/publication/aftershock-pervasive-effects-tariff-hikes/
20. “Global Outlook 2019: Slower, But Continued Growth,” ABN-AMRO; https://insights.abnamro.nl/en/2018/11/global-outlook-2019-slower-but-continued-growth/