Global Risk: Trade Wars

RISK: GLOBAL TRADE WAR BREAKS OUT

Several events have heightened fears of a global trade war: the U.S. placing tariffs on imported steel and aluminum, European threats to retaliate if not exempted from the tariffs, President Trump proposing tariffs on imports from China, China proposing tariffs on U.S. imports, the potential failure of NAFTA talks and President Trump's tweet that "trade wars are good and easy to win.”

On the campaign trail, President Trump promised to “get tough on trade.” Now he’s following through on that promise. Among the president’s most strongly held beliefs is that the U.S. has suffered because of free trade. His statement that “trade wars are winnable” suggests he will give no quarter in negotiations. It also suggests the lengths to which he will go to reduce imports and boost exports.

Any tariffs on imports will likely face retaliatory tariffs on U.S. exports. Should President Trump continue to deem other nations’ levies as a threat to national security and expand U.S. tariffs, his actions would invite reciprocal moves. From there, inflationary pressures kick in as the added costs to imports push up consumer prices, consumption slows and economic growth loses its momentum. Just the fear of a trade war would impact business confidence, creating a wait-and- see attitude that places investment decisions on hold. This would spark a sell-off in stocks and slow economic growth even further.

The U.S. has tried something like this before. Congress passed the Smoot- Hawley Tariff Act in 1930, imposing tariffs on more than 20,000 imported goods to protect U.S. industry. The actions that Congress took to protect the U.S. made things worse for everyone. Other countries retaliated, imposing their own tariffs. World trade decreased nearly 70 percent and the global economy sank deeper into recession.

A trade war today would produce an equally sharp decline in trade flows, disrupt global supply chains, curtail consumer spending, boost inflation, raise interest rates, reduce disposable income and slow economic growth. Houston’s economy is still struggling to recover from the oil price crash. At the very least, a global trade war would prolong Houston’s recovery. At the very worst, a global trade war could tip Houston back into recession.

RISK: A TRADE WAR WITH CHINA

The Trump Administration has threatened to impose tariffs on more than 1,300 items imported from China. As justification for his actions, the President has cited the loss of U.S. manufacturing jobs to the Asian nation, the enormous U.S. trade deficit with the country, threats to national security, the forced transfer of technology as a pre-condition for joint ventures with Chinese firms and the outright theft, through cyberattacks or other means, of intellectual property.

The president has signaled his intent for some time. In April last year, he directed the U.S. Department of Commerce to investigate whether imports of steel from China could be a threat to national security.

In August, he asked the U.S. Trade Representative to investigate China’s general trade practices with a focus on China’s alleged theft of U.S. intellectual property. In January of this year, to test the waters, Trump placed tariffs on imported solar panels, most of which originate from China. Thus it should have been no surprise when in March, the President proposed tariffs on $150 billion in Chinese imports. China’s leadership responded in kind, proposing tariffs on 127 U.S. products valued at $50 billion. The U.S. exports subject to Chinese tariffs include agricultural products, chemicals, plastics, automobiles and automobile parts. Chinese imports subject to U.S. tariffs include items such as steel, aluminum, medical devices, aircraft parts and various consumer goods. As of this writing, U.S. tariffs are subject to hearings and public comment before implementation.

Chinese tariffs on U.S. goods are subject to President Xi Jinping’s final authorization.

Any action that impacts U.S.-China trade would be felt in Houston. China ranks as Houston’s second largest trading partner (behind Mexico), with more than $18.8 billion in goods moving between Houston and the Asian nation in ’17. That represents 9.8 percent of all foreign trade for the region. The vast majority of Houston exports to China are related to the energy industry: oil, fuels, chemicals, plastics and industrial machinery. The top goods imported from China into Houston include industrial machinery, electrical machinery, computers, iron and steel, and consumer goods such as toys and furniture.

Houston’s relationship with China has grown more important over time. In ’01, China ranked fourteenth among Houston’s trading partners. Since ’15, it has ranked either first or second, often trading spots with Mexico.

In December ’17, Mayor Sylvester Turner led the largest Houston delegation in the city’s history on a trade mission to Shenzhen, Shanghai and Beijing. Discussions there focused on the export of oil field equipment to China, ways in which the Texas Medical Center can help China improve its health care system, potential liquefied natural gas (LNG) exports to the nation and opportunities for Chinese firms to invest in Houston. The Partnership is also working with several Chinese companies looking to open factories in the region. All these deals might collapse if the trade dispute between the U.S. and China escalates.