Commentary: Trade disputes will disrupt global trade and supply chains

Growing up in Ghana and Nigeria, and then attending college, graduate school and pursuing professional credentials after that in the United States, coupled with my professional experience since college, and my past decade pursuing a career in early-stage investing, hopefully give me a unique perspective on this topic.

Today, the most accurate way to think of supply chains is in three ways:

• First, information and data supply chains are a non-physical and typically traverse national borders.
• Second, conventional supply chains used to move physical goods cannot function effectively or efficiently without tightly integrated information and data supply chain infrastructure.
• The production of the most valuable physical goods that people consume today relies on complex supply chains that source raw materials in certain parts of the world. Then manufacturing into finished goods or parts occurs in other parts of the world. Finally, the goods are shipped to consumers for final consumption in yet other parts of the world.

In sum, modern supply chains are complex systems which are susceptible to cascading unintended consequences due to policies pursued by national governments that do not take a holistic view of global trade or supply chains, and that are not guided by or based on a common understanding of the basic principles of economics.

Barriers to trade affect consumers directly and indirectly. The direct impacts arise when businesses that have pricing power pass 100 percent of the financial burden that barriers to trade create on to their customers. The indirect impacts arise when businesses that do not have pricing power absorb some or all of the increase in operating expenses, forcing them to make some employees redundant as these businesses attempt to maintain their profit margins. In both cases, it is not difficult to understand how the broader economy starts to buckle; lower consumer consumption leads to reduced business sales. Lower business sales and increased operating costs lead to reduced production. These interact to create a reflexive spiral of negative business and consumer sentiment about the state of the economy.

Here are some highlights from Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions by Erika York, Kyle Pomerleau and Robert Bellafiore of the Tax Foundation, based on the Tax Foundation’s Taxes and Growth Model, as of April 2018. If all the tariffs announced by the Trump Administration as well as other national governments as of April 2018 were fully implemented:

• United States GDP would fall by 0.79 percent, a reduction of $196.77 billion, over the long run.
• Wages would fall by 0.51 percent.
• Employment would fall by the equivalent of 609,644 full-time jobs.

Given this administration’s tendency towards belligerent and ad-hoc decision-making on these issues, one may safely assume that April 2018 represented the optimistic scenario.

Concurrently, according to data on global government bonds as of May 31, 2019 at The Wall Street Journal’s Market Data Center, yield rates and spreads over U.S. Treasury bonds of 2-year, 5-year and 10-year maturities are respectively below their levels over the previous month, and the previous year. This is the case for government bonds in Australia, Belgium, France, Germany, Japan, the Netherlands, Portugal, Spain, Sweden and the U.K.

Furthermore, according to data on international stock indexes as of May 31, 2019 at The Wall Street Journal’s Market Data Center, the Global Dow, the Global Dow Euro, the DJ Global Index and the DJ Global ex-U.S. each closed the session an average of 3.8 percent below their level 52 weeks ago.

If that is not persuasive enough, the June 3, 2019, J.P. Morgan Global Manufacturing PMI^TM produced by J.P. Morgan and IHS Markit in association with ISM and IFPSM stated, “Global PMI surveys signaled that manufacturing downshifted into contraction during May. Business conditions deteriorated to the greatest extent in over six-and-a-half years, as production volumes stagnated and new orders declined at the fastest pace since October 2012. The trend in international trade continued to weigh on the sector, with new export business contracting for the ninth month running. Business optimism fell for the second month in a row and to its lowest level since future activity data were first collected in July 2012.”

While this data is interesting, and relevant, the real issues of concern are those that aren’t adequately captured in data – the information about hardening attitudes and perceptions towards economic cooperation and free-trade among countries. In what I consider an unexpected and unusual move, the Government of China has published a white paper – China’s Position on the China-U.S. Economic and Trade Consultations. Readers of the white paper can agree on one thing; We are entering uncharted waters as far as global trade is concerned. How will current disputes affect how countries interact with one another as it relates to global trade? Will the progress of the past few decades be eroded due to political sentiments around the world that have led us to these specific trade disputes between the United States and its most important trading partners?

Coupled with the trade disputes between Mexico and the United States, prior disagreements between Canada, Mexico and the United States about NAFTA, this dispute between China and the United States, as well as other trade-related disagreements that appear to be simmering just beneath the surface, one can only conclude that the global economy is in for a bumpy 18 to 36 months.

There’s extreme turbulence ahead. Buckle up your seatbelts.