US tariff flip-flops and a neutered WTO will hit trade and business costs, and confidence, into 2020

The mercurial US trade policy and the lack of a platform for countries and businesses to adjucate trade complaints, with the WTO court in disarray, is undermining trade and business confidence, even as costs rise alongside tariffs

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US Trade Representative Robert Lighthizer at a finance committee hearing last year. The latest US tariff threats on Brazil and Argentina have raised a question: what other trade threats we thought were in the past might creep back into the frame? Photo: Bloomberg

Published: 1:00am, 14 Dec 2019Updated: 6:26am, 14 Dec 2019

Tariffs levied by the US and China on each other might be grabbing headlines, but other developments in international trade are worth watching, too. Trade will continue to shape the market outlook in the coming year and beyond. There are two clear channels through which trade tensions feed into markets: costs and confidence.

Raising tariffs increases the costs borne by importers, who either pass these along to consumers in the form of higher prices or accept lower margins. This has an effect on equity markets. Elevated margins are a key reason the US equity market has done so well in the aftermath of the global financial crisis.

Higher prices can also crimp activity in trade. Budgets are used up faster when prices are higher, so trade volumes often fall when tariffs rise, causing related activities such as trade financing and logistics to suffer. This effect is particularly pronounced in Hong Kong under the US-China trade dispute.

Costs are easy to identify and track. When the US announced a Section 301 investigation into France’s digital services tax – a recent under-recognised disruption to global trade – and that tariffs could result, markets started to take higher costs into account. Notably, the US also used Section 301 of the 1974 Trade Act to investigate Chinese intellectual property practices, which led to tariffs on roughly US$350 billion of imports from China.

Confidence is a much bigger worry and more complicated. Uncertainty about trading relationships can cause businesses to cut investment. Business confidence, already dampened by the US-China trade war, will face more uncertainty next year.

For one, the US has threatened to reimpose tariffs on steel and aluminium imports from Brazil and Argentina. The tariffs, announced in early 2018, had been put aside after the US agreed to duty-free quotas from the two nations, limiting the quantity shipped to the US. Businesses had firmly moved the steel and aluminium issue off their list of worries for 2020.