Against a more turbulent background, trade watchers should stay tuned to the following developments in 2019:
1. US-China: The biggest story is likely to remain the ongoing battle between the United States and China. The most immediate deadline is March 1, when the US has promised to impose 25% tariffs on $200 billion in Chinese imports that are currently subjected to 10% tariffs, if the two sides cannot successfully negotiate their way out of the complaints lodged in the Section 301 case.
Chinese officials are meant to travel to the US later in January to continue discussions, followed by more talks in mid-February. Given the rapidly closing timeline, however, getting a satisfactory conclusion to the long list of US objectives is unlikely.
[Note that the US government shutdown could also complicate discussions, as 75% of USTR is now out on furlough, as well as many other US officials in agencies across government that might otherwise be involved in planning or discussions related to negotiations with China.]
Three scenarios are possible: 1) US President Donald Trump accepts an outcome that does not really address the systemic complaints at the heart of the Section 301, but goes for a package that includes more Chinese purchases of US agricultural and energy goods plus some limited commitments on Chinese reforms; 2) the timeline is extended, as talks are making headway with a resolution closer to filling most of the Section 301 demands possible by mid-year; or 3) talks collapse and tariffs are imposed on the $200 billion in goods, ramping up to include all Chinese imports to the US before the end of the year.
Unfortunately, because Trump is so mercurial, all three outcomes are equally plausible at this point.
2. Supply chain disruption. The disruption in supply chains is likely to pick up speed in 2019. The reasons for disruption vary from the US-China trade conflict to general slowdown in growth inside China, to the fallout from Brexit, to the rise of new trade agreements and the continuing pressures from new technology. The net result is faster dislocation in traditional supply chain patterns.
Firms should be reexamining their existing supply chains to confirm whether or not they remain suitable in a time of rapid change. Particularly for managers looking for new investment locations, it makes sense to take a more holistic approach to managing supply chains, manufacturing, services, warehousing and investment decisions.
3. Free trade agreements, especially CPTPP and EU-Japan. While there are many free trade agreements that already exist, two new deals promise substantial benefits to firms in 2019—the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the EU-Japan agreement. CPTPP is already live between seven countries (Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam).
Officials are meeting on January 19 to discuss how to add more members. Before the end of 2019, CPTPP could include not just the remaining original members that have not yet ratified the agreement domestically (Brunei, Chile, Malaysia and Peru), but have an equally large set of new members negotiating accession.
The European Union trade deals with Singapore and Japan will also deliver substantial benefits in 2019, with the agreement with Vietnam ready for a 2019 signature.
4. Continued battering of the WTO and the global trade regime. The CPTPP and the EU agreements are bright spots in an otherwise gloomy trade landscape. The global trade regime, particularly represented by the World Trade Organization (WTO), will continue to struggle in 2019.
In fact, 2019 is set to be an even worse year for the WTO as several particularly ugly trade disputes come to a head. The trade “court” will be unable to manage these arguments, partly because they pit the largest and most powerful countries against one another in ways that can only undermine the organization even further and partly because the court itself is structurally collapsing.
It is clear that the WTO needs fresh thinking, but the institution is stuck. The 164 members cannot agree on the way forward and the largest country currently appears bent on tearing the whole thing down.
Unfortunately, free trade agreements cannot carry the load by themselves. Every FTA is “built” on top of existing WTO rules. If the WTO collapses, there is effectively no foundation for global trade.
5. More trade challenges, especially for e-commerce and digital trade. Partly as a consequence of the unusual actions taken by the United States in 2018, an increasing number of countries are also opting to disregard long-standing rules and norms on trade. India and Indonesia, as example, have also raised tariffs on specific products. Others are imposing a wide variety of non-tariff measures.
As trade flows continue to slump, governments are likely to search for revenue in new, more creative ways. Many are going to start looking to e-commerce and digital trade companies as targets in 2019. Firms should prepare for movement from relatively unregulated or lightly regulated environments to an increasingly complicated trade landscape.
Much of the burden will fall most heavily on the smallest firms.
The Global Trade and Investment Council at the World Economic Forum just released its own four scenarios for trade in 2019. These scenarios are meant to help structure discussions with global leaders in Davos. While the Council would clearly prefer that leaders figure out how to remain in a world of open international rules, the group was unable to provide clear recommendations on how to achieve this best-case scenario.
The inability of top thinkers gathered together for two straight days with repeated work across conference calls and email exchanges to develop proposals to cope with a rapidly evolving landscape for trade suggests the primary challenge for firms will be trying to navigate a highly uncertain environment in 2019.
Trade has rarely been more interesting. But it has also not offered up so many diverse risks and opportunities from so many angles all at once.
***Talking Trade was written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***