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Northern winds & the proverbial snow: Global economic warnings

Imtiaz A. Hussain | Published: March 07, 2019 21:01:32 | Updated: March 10, 2019 20:40:31


"The north wind doth blow," a timeless western nursery rhyme observes, "and we shall have snow," it forecasted. One does not have to be in the "west" to face and feel that snow: Trump's tariffs upon China amid China's sudden economic "normalisation" predict that anyway.

Of course, the big startling news at the end of the first 2019 quarter is not the US-China trade-war (which has been snowballing since July 2017), but China itself announcing its 2019 economic growth-rate will drop to 6-6.5 per cent from 6.6 per cent for 2018. While the figure is envious to many developed countries, for China it is the lowest since the 3.9 per cent in 1990 and 4.2 per cent in 1989, indeed the fourth lowest since Chinese economic liberalism began from late 1970s (with 1981's 5.1 per cent being the other low figure). Ever since, Chinese growth-rates have hit dreamy double-digit figures in all but 25 years (out of 40), reaching as high as 15.2 per cent in 1984, 14.2 per cent in 1992 and 2007, 13.9 per cent in 1991, and 13.4 per cent in 1985. Since the Great Recession (2008-10), though, China has been spiralling downward from 9.5 per cent in 2011. One possible conclusion: China is normalising, meaning its growth-rate has come down to earth.

Yet, the global consequences could be far more tectonic. For a start, a slumping Chinese economy will throttle imports, thus bottling up global trade just when a recovery breakthrough is needed from the Great Recession. Then, China's paradoxical policy responses announced by Premier Li Keqiang to the National People's Congress in the first week of March 2019 eases borrowings, raises the value-added-taxation threshold from $4,500 to $15,000, cuts taxes by $298 billion, and still removes many trade restrictions, all signalling that talks with the United States may produce a more level playing field by the end of March.

Two major implications should not be lost. First, without Trump's tariff, China might not have blinked so soon. Behind that enormous kudos, the Trump tariff is turning a more stable (yet fragile) global economic playground (itself as asymmetrical as it always has been) into smithereens at the wrong time. More about that later, since the second implication, of opening new (Chinese) windows to the rest of the world, should propel other "emerging" or "frontier" economies into their own self-enhancing adjustments expeditiously.

Bangladesh is one of those economies capable of benefiting, at least avoiding the costs. Stabilising to adjustments necessitated by China's "normalisation" will be costly, impacting both trade and investment. Compensating for short-term import restrictions before China swings into long-term liberalisation, and more costly investment terms, particularly for new projects within the Belt-and-Road Initiative (BRI) rubric, exemplify where those costs will have to be borne.

Yet, the benefits could thereafter be enormous. When increasing labour costs push Chinese factories off-shore, Bangladesh's ready-made garment (RMG) sector would be more than qualified to host them. When China begins to do so is the first hurdle for Bangladesh, feeding into that time-lag costs; but more significantly is whether the Chinese RMG factories will be attracted enough to come to Bangladesh, given the far more lucrative next-door (and more efficient) Burmese, Cambodian, and Vietnamese locations. Bangladesh RMG producers will simply have to go out of the routine production box (in terms of wages, durable energy supply, plant-port transportation ease, and facilitative port storage capacities). These are not beyond Bangladesh's interests and abilities to supply (as it has shown after the 1974 Multi-Fibre Arrangement ended in 2004, withdrawing a variety of preferences favouring less developed countries). It must first (a) restore peace in the factories, where wage-based restlessness has dotted 2019 thus far, (b) rapidly complete its mega-projects to attract would-be off-shore corporate interest; and (c) vigorously campaign to feed the Chinese RMG-market with cheaper products once Chinese RMG plants migrate abroad.

More crucial may be the state of the global economy. This is where the discussions must return to the potentially most critical post-Great Recession variable: the Trump tariffs, the most restrictive since the 1930 Hawley-Smoot Tariffs spawned the Great Depression, lasting the entire 1930s, with average US tariffs rising to two-thirds of each imported product's value, and culminating, for a variety of other reasons, in the most devastating of conflicts (World War II).

To interpret those tariffs as being punitive is not enough: this approach justifiably punishes those countries taking undue advantages of trade liberalisation, either free-riding where they should not be for too long, or being simply too self-seeking (penetrating new markets without reciprocating). No one questions how China was doing that to the United States for too long to be able to rack up more than $4.0 trillion worth of surpluses to fund the BRI projects elsewhere in the world. Yet, China was not the only Trump target: next-door Canada and trans-Atlantic European countries (all enjoying the most stable post-World War II US trade relations), were also targeted. On the one hand, all of these countries free-rode the US economy, simply because Cold War metrics necessitated they do, but they did so for far too long, for four full decades. Something had to give, yet the 1990s economic boom simply hid any correction from view, within both the United States and those very countries themselves.

On the other hand, though, the United States extended the Trump tariff mentality to India this month, listing all products benefiting from the Generalised System of Preferences (GSP) provisions, suggesting "tit-for-tat" interpretation is no longer sufficient to describe the emerging wrangle. Although not in effect as yet (and capable of hitting up to $6.0 billion Indian exports with over $200 million in tariffs), we get a sense of future trajectories: the tariff mindset will now be utilised without discrimination, meaning a lot larger part of the world could be impacted, thus breeding protectionism more extensively than the fragile global economy can handle; and, without domestic industrial restructuration, no US retreat from this mindset seems possible in the near future. Developed countries drifting elsewhere might be lured by China's overtures, but the scope for global economic recovery will also be severely crippled.

It is this crippling global economic recovery that hurts Bangladesh the most. For the country to meet its $50 billion export target by its 50th birthday (in 2021), it needs a more resurgent global economy than presently persists or predictable. Not only may its RMG exports to new markets, like in Latin America, get exposed to unwitting obstacles, but also its export-product diversification, which needs a healthy global trade climate, also gets snuffed out. China, its largest partner, faces transitional speed-bumps; India, its second largest, seems set for an indecisive electoral outcome, thus obfuscating a critical global moment; the United States, its other major single-country trading partner, prefers drawing down the shutters to opening new windows; the European Union (EU) seems to be casting its fate to an unpredictable populist fate; and the rest of the world, where growth has recently surged, cannot but catch the flu when China, India, the United States, and the European Union keep coughing so frequently and simultaneously. Bangladesh may need to rethink its own options very honestly, cogently, and, above all, more pragmatically, to avoid the "northern snow."

Dr. Imtiaz A. Hussain is Professor & Head of the Department of Global Studies & Governance at Independent University, Bangladesh.

imtiaz.hussain@iub.edu.bd

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