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  • GLOBAL TRADE WATCH

    Cristina Constantinescu, Aaditya Mattoo, and Michele Ruta with contributions from Maryla Maliszewska and Israel Osorio-Rodarte

    May 29, 2019

    GLOBAL TRADE WATCH 2018*

    Trade Amid Tensions

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  • * Global Trade Watch—a joint product of the Macroeconomics, Trade, and Investment (MTI) Global Practice of the World Bank and the Trade and International Integration Team of the Development Research Group—provides up-to-date data from an array of sources, along with analysis of recent trade developments. The report was produced under the guidance and supervision of Caroline Freund, Director, MTI, and Antonio Nucifora, Practice Manager, MTI. We are grateful to Erik Churchill, Csilla Lakatos, Gladys Lopez-Acevedo, Ambar Narayan, Franziska Ohnsorge, Martin Raiser, Joseph Rebello, Carolina Sanchez-Paramo, and colleagues at the World Bank for their insightful comments and suggestions.

  • i

    Table of Contents

    Overview: Trade Amid Tensions 1

    Chapter 1: Trade developments in 2018 and early 2019 3

    1.1. Trade flows and trade policy developments 3

    1.2. Changes in trade patterns due to United States-China trade tensions 6

    1.2.1. United States 7

    1.2.2. China 13

    1.2.3. Other countries 15

    Chapter 2: Implications of U.S.-Chinese trade tensions 18

    2.1. Short-term effects 18

    2.2. Long-Term Effects 21

    References 27

    Annex A 28

  • 1

    Overview: Trade Amid Tensions

    Global trade growth slowed in 2018 amid a weakening of economic growth in China and the Euro Area and rising trade protectionism. The volume of trade grew by 3.8 percent, down from 5.4 percent in 2017, but has shown signs of stabilizing in the first quarter of 2019. However, the U.S. tariff increases implemented in early May and China’s response might change the outlook.

    Trade policy developments are mixed. Restrictive trade measures imposed during 2018 affected 3.8 percent of world merchandise trade—nearly three times the share affected in any of the years since the global financial crisis of 2009. Tit-for-tat tariffs between the United States and China alone affected 2.0 percent of world merchandise trade in 2018. In May 2019, the United States increased the tariffs implemented in September on imports from China of approximately $200 billion to the levels originally threatened for January 2019, and China announced its plans to retaliate. Yet, 2018 also saw positive trade policy developments, with the signing of a number of regional trade agreements (e.g., African Continental Free Trade Area; Comprehensive and Progressive Trans Pacific Partnership; U.S., Mexico, Canada Agreement).

    The tariffs have changed trade flows in affected goods. China’s imports from the United States of goods targeted by tariffs dropped by 8 percent in 2018 compared with 2017, whereas U.S. imports from China of goods affected by tariffs grew by 9 percent because of strong domestic demand and in anticipation of tariff increases. In the first quarter of 2019, China’s imports from the United States of goods affected by tariffs declined by 40 percent on a year-on-year basis while U.S. imports from China of targeted products dropped by 24 percent.

    Retaliatory tariffs by the United States and China diverted trade from each other to many develop- ing countries, including Brazil, India, Malaysia, Mexico, and Vietnam. Soybean exports from Brazil to China soared by $8 billion in 2018 (an increase of nearly 40 percent), offering one of the most significant examples of trade diverted by U.S. and Chinese tariffs.

    Tariffs did not affect all goods in the same way. For example, U.S. imports of products such as electri- cal connectors from China—which a specific company tends to manufacture for a specific business in the United States—increased by 1 percent year on year from August through December 2018. Trade in such goods tends to be more resistant to tariff shocks because they cannot be easily substituted. In contrast, U.S. imports from China of hard-disk-drive units, which are more easily substituted, declined by as much as 85 percent, shifting in part to the Philippines. The evidence shows that the United States targeted “stickier” products than China, resulting in smaller effects on trade volumes.

    Ongoing trade tensions affected importers in United States and China significantly. While trade fell in targeted products, prices at the border did not change as compared with non-targeted products. For example, in the United States, roughly half of products targeted by tariffs saw an increase in the price charged by Chinese exporters and half saw a price decrease, similar to the distribution of price changes of non-targeted products. Results are similar for China. The evidence indicates a high pass- through of tariffs to import prices for most products in both the United States and China, at least in the short run. Going forward, if traders believe the tariffs will be in place for a long period, exporters may reduce prices to stem import declines.

    The effects on global poverty have been muted. But if trade tensions continue to intensify and cause a slump in investor confidence, the effects could be significant—up to 30.7 million people could be

  • 2

    pushed into poverty measured as income levels below $5.50 a day, and global income could fall as much as $1.4 trillion in a worst-case scenario. Developing countries other than China would bear roughly half of the global income loss.

    Even though trade in stickier inputs tends to be relatively resilient in the short term, if trade tensions are not resolved, existing global value chains are likely to be disrupted in the longer term. Tariffs applied by the United States on imports from China are biased so far against intermediate goods. As a result, a Computable General Equilibrium model predicts that U.S. imports of intermediate goods from China would decline in the longer term by over 40 percent, with the U.S. likely to reallocate its sourcing of intermediate inputs to other trading partners in Asia and Europe, and to Canada and Mexico. These switches could result in adjustment costs in the sectors and locations affected by trade diversion.

    The early evidence for 2018 and the first quarter of 2019 points to some useful lessons: Trade tensions and tariff increases hurt the countries directly involved the most, although they could have long-term consequences for all countries because of the increase in uncertainty; other countries would do well to stay out of the fight, and continue with trade deals that preserve and improve open markets; and a managed trade deal between the two countries involved, especially one involv- ing promises to increase bilateral purchases, is likely to divert trade away from other countries. It is in the long-term interest of industrial and developing countries for trade tensions to be resolved through a multilateral approach and World Trade Organization reforms.

  • 3

    Chapter 1: Trade Developments in 2018 and Early 2019

    1.1. Trade Flows and Trade Policy Developments

    Goods trade volumes slowed in most regions compared with 2017 because of softening eco- nomic growth in Europe and Asia and the resurgence in protectionism. After growing at 5.4 percent in 2017, goods and services trade volumes grew at only 3.8 percent in 2018. Gross domestic product (GDP) growth was only slightly lower, at 3 percent. The sluggish trade perfor- mance in 2018 resembles that of the 2012–2016 period. The stronger performance in 2017 stands out as an outlier (figure 1A).

    Services trade values have been more resilient than goods trade values in recent years but grew at a similar pace in 2018. Services trade values (excluding transportation services) fell less than goods trade values during the Great Recession and have grown faster subsequently, although in 2018, services and goods trade values grew at a similar pace (figure 1B).

    Goods trade volume was particularly weak in the fourth quarter of 2018, reflecting weaker industrial production in the European Union and China and the accumulation of trade-tension effects. According to preliminary data, goods trade volumes grew at approximately 4 percent year on year in the first three quarters, before slowing to less than 2 percent in the fourth quarter, a rate last seen in 2016 (figure 1C). Goods trade volumes dropped by 0.5 percent year on year in the first two months of 2019, but signs of stabilization emerged toward the end of the first quarter, reflecting in part the stimulus-driven recovery in China (World Bank 2019a).

    Advanced and emerging markets made similar contributions to demand for imported goods in the last two years. In 2012 and 2013, global imports were supported mostly by the contribution of emerging markets, while the opposite was true during 2014–2016. The years 2017 and 2018 saw more balanced contributions (Figure 1D).

    Goods trade volumes slowed in most regions compared with 2017:

    • In the Euro Area, goods trade volumes were almost flat in 2018 for the first time since 2012 (figure 1E), as weaker internal and external demand dampened growth. Trade sluggishness in the Euro Area was broad based across partners a

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