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If there was ever a Downing Street script for what the first working day after Brexit would look like, this almost certainly wasn’t in it. The slump in Chinese markets and pretty much every financial instrument and commodity related to the Chinese economy on Monday is a bad omen for the U.K.’s newfound #ReadyToTrade freedom (as the government’s hashtag goes).
Then again, if there was ever a script for President Donald Trump’s Monday of the 2020 Iowa caucus, a looming pandemic and related turmoil in financial markets wasn’t in it either.
It’s hard to overstate how much promised changes in the narrative on trade and the global economy are at the center of the 2020 hopes of both Boris Johnson and Trump. And how what is happening in China threatens both their plans.
Johnson needs a resolution in 2020 to the myriad questions posed by Brexit over the trade relationship with the European Union and to at least make progress on new free trade deals with the U.S. and others. Inject an economic shock such as a virus-related slump in China’s growth and global trade and all those plans become more complicated. Never mind the likely impact on the U.K.’s growth.
Trump’s strongest case for re-election is an economic one. He has pivoted from trade wars to touting his trade deals and the boost his advisers are telling voters they will bring. And so far a strong U.S. economy propped up by some old-fashioned fiscal juicing and a central bank eager to offset any presidential policy mistakes have helped mask the costs of his tariffs and trade wars.
But the impact in the U.S. of a significant slowdown in China will be harder to hide.
Last year featured both manufacturing and business investment recessions in the U.S. thanks partly to the uncertainty fed by Trump’s trade wars. The case for an American bounce in growth from the 2.3% last year hinges on both manufacturing and investment recoveries.
China’s slowdown, however, is only likely to breed more uncertainty. If global supply chains are frozen — or even just slowed — by a pandemic, Trump’s economic case will take a visible blow.
The coronavirus now spreading also threatens the credentials of Trump’s trade peace with China, of course.
First, it makes the $200 billion Chinese buying spree at the center of the phase one deal that Trump signed triumphantly last month even less likely.
It’s also not hard to make the case that it raises more doubts about a phase two in which Trump has promised to extract meaningful Chinese reforms to its system of industrial subsidies. With a crisis upon them, the last thing Xi Jinping and his advisers in Beijing seem likely to countenance dismantling is a pillar of their economic model.
Johnson just gave a speech laying out his trade plans and a case for British economic optimism. Trump is due to deliver his annual State of the Union and the American case for the same on Tuesday ahead of his anticipated acquittal in his impeachment trial on Wednesday.
Waking up in Washington on Monday the case for optimism already looks damaged, though. By the end of this month — maybe even this week — it could be seriously wounded. That wasn’t in anybody’s plan so early in 2020.
Charting the Trade War
Britain and the EU have until the end of this year to hammer out the terms of their future relationship including a trade agreement. While much of the focus has been on how the divorce might impact the U.K. itself, EU businesses also have plenty at stake. A list of tariffs compiled by the British government last year in preparation for a hard Brexit, still stands as a potential fallback if negotiations fail. To get a sense of how that would impact trade, we looked at previous exports from the remaining EU countries to Britain, and found that of the 301.2 billion euros of goods exported in 2018, roughly 47.3 billion euros (16%) would likely be exposed to the new tariffs.
Today’s Must Reads
Three’s company | Trump is setting himself up to be a geopolitical disruptor again — this time on the sidelines of the U.K. and EU’s negotiations for a post-Brexit trade deal. A day in the life | To capture an ordinary day during this extraordinary period in the history of the global economy, Bloomberg deployed reporters across the world to see the inner workings of trade up close. Vietnam in the middle | The Cold War battleground once looked like one of the few winners as the U.S. and China vied for dominance. Now it’s bracing for trouble. Korea’s slump | A decline in South Korean exports worsened in January despite signs of green shoots in global trade as the Lunar New Year holiday reduced the number of working days at the end of the month. North Asian tensions | Japan filed fresh dispute proceedings at the World Trade Organization against South Korea over alleged shipbuilding subsidies, a sign that tensions may be resurfacing.
Central bank outlook | From trade wars to a health crisis, uncertainty mounts for world’s monetary authorities. China contagion | Bloomberg Economics explains what the coronavirus shock means for ECB and BOE.
Feb. 5: U.S. trade balance Feb. 7: German trade balance
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–With assistance from Demetrios Pogkas and Jeremy Diamond.
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