Even before a round of U.S. tariffs levied on China comes into force Friday, there are signs that global trade is already cooling.
Business surveys published this week show that global export growth, strong in 2017, has slowed to a relative crawl—helping to drive sharp stock-market falls in big exporting nations like South Korea and Japan.
The data suggest that the synchronized world-wide growth that sustained global markets and company earnings for much of last year is already starting to run on empty. And that slowdown is likely to have a greater impact on trade than the developing conflict among the U.S., China and other major economies, analysts and investors say.
“There is a huge correlation between the performance of Asian exports and Asian earnings. You can extend that analysis from global trade to global earnings,” said Tai Hui, chief markets strategist for Asia at J.P. Morgan Asset Management. Companies in sectors like consumer electronics are already suffering, he added.
For nearly half a year, surveys of purchasing managers in manufacturing have indicated dwindling international demand growth, as major economic regions like the eurozone and China come off the boil.
The new-exports portion of JP Morgan’s Global Manufacturing PMI fell to 50.5 in June, its weakest in nearly two years. The figure remains above 50, indicating export orders are still rising, but it has grown weaker every month since hitting its most recent peak at 54.2 in January.
The orders data closely mirror year-on-year changes in world trade volumes, suggesting last year’s 4.8% rise in global merchandise trade—the strongest since 2011, according to the World Bank, and representing an extra $1.13 trillion worth of goods changing hands—is unlikely to be repeated.
The volume of global trade is so large that even modest changes in its rate of growth are more consequential than what is directly at stake in the row between the U.S. and China. U.S. tariffs due to be implemented on Friday cover $34 billion in Chinese goods; China is levying retaliatory tariffs on an equivalent amount of American exports.
China’s customs agency unexpectedly issued trade data that showed growth in exports to the U.S. slowing earlier this week, although some analysts raised doubts about the reliability of government statistics.
Already-imposed tariffs—such as the U.S. has placed on steel and aluminum imports—may not have a meaningful impact on most Chinese businesses.
“With Asian steel and aluminum companies, most of the exports are actually inter-regional. It’s only 0.1% of total productive capacity that even goes to the U.S. for Chinese steel companies. Aluminium is just 2%,” said Catherine Yeung, investment director at Fidelity International.
The global trade moderation explains the recent sell-off in emerging-market bonds and equities better than any fears of rising protectionism, BCA Research, an independent Canadian research firm, argued in a report last week. Any fall in trade is likely to first hit economies integral to globalized manufacturing processes, such as those of several emerging countries in Asia.
“When global trade expands, weak parts of the chain do well. Conversely, when global trade growth dwindles, these same weak links are the first to break,” said Arthur Budaghyan, chief emerging markets strategist at BCA Research.
For sure, some economists argue there’s a link between the rise in protectionist policies and soft global export data—even if many talked-about tariffs haven’t yet taken effect.
“It might be that companies are anticipating trade becoming more difficult with China or with the U.S. and are adjusting their supply chains,” said Joanna Konings, senior international trade economist at ING in Amsterdam.
The latest manufacturing PMI from Germany, an outsize player in global supply chains, offers some weight to that interpretation. Export sales growth there was the weakest in over two years, and a number of businesses cited declining orders from the U.S. and China.
Even small tariffs can have big effects on business confidence. Imposing tariffs in a world of integrated, multinational supply chains might be self-destructive and would likely pass through to U.S. consumers, according to strategists at Morgan Stanley .
“If the trade dispute becomes more complicated, if both sides are not willing to change their stance, you could end up with a much more serious disruption,” said William Yuen, investment director at Invesco.