September – Trade Outlook

Trade Wars: Why the US must think before it acts

There are times when it is helpful for a nation’s leaders to think carefully about the consequences of their statements. North Korea tested an H-bomb capable of being fitted to an Inter-continental ballistic missile on the 3rd September. Without any exaggeration, this is a momentous time for the world’s security. North Korea is playing with both China’s will to intervene substantively and the US’s will unilaterally to start a major war on the Korean peninsula. China is keen to avoid any action that will result in a stream of refugees coming across the border from North Korea. The US, despite statements from President Trump that any aggression by North Korea will be met with “fire and fury” will be reluctant to avoid full-scale conflict because of the risk of retaliation.

So this has become a Trade War. On the 3rd September, President Trump tweeted, “The United States is considering in addition to other options, stopping all trade with any other country doing business with North Korea.” This is a bold statement targeted, of course, at China which accounts for around 85% of North Korea’s trade value. Since Steve Bannon’s statement in August 2017 that the US is effectively fighting a trade war with China, the statement could be interpreted as simply a desire to take on China’s relationship with North Korea and its trade surplus with the US at the same time.

President Trump should be wary what he wishes for. Apart from China, North Korea’s top ten trade partners (imports and exports) include, Russia, India, the Philippines, Singapore, Chile, Germany, Hong Kong, Indonesia, Switzerland and Mexico. China itself exports around $US 2.8bn into North Korea and other countries are substantially smaller. Russia, for example, imports just $US 68m and India some $US 54m. For many other countries the amounts are in the low millions. However, if the President’s words are to be taken at face value, then all of these countries should be included. Taken together and including China, these countries accounted for nearly 48% of the US’s total trade of $US 3.9 trillion in 2016 (Figure 1).

 

 

Figure 1:          Value of US trade for North Korea’s top 22 trading partners ($US bn)

Source:            Equant Analytics, 2017

Of greater interest is the sectors that would be affected by trading with countries that “do business” with North Korea. Mexico is a major player in the US’s electronics, automotive and machinery and components sectors and, of course, in oil. But its trade with North Korea is small, as is the trade of many other countries with North Korea. It makes sense to look just at China and how its key sectors are interwoven into strategic sectors for the US (Figure 2).

This chart in itself depicts the frustration that the US has with China’s dominance of its trade. US supply chains, are irretrievably interwoven with China. For example, many of the imports from China in Electrical Equipment and Machinery are intermediate manufactured goods, nevertheless, these goods are part of other supply chains, for example in automotives or aerospace.

 

Figure 2:          US trade with China in non-oil strategic sectors ($US million 2016)

Source:            Equant Analytics, 2017

 Quite apart from any impact that the decision to stop trading with all those nations that have trade with North Korea, there is a sense in which any sanctions, or sanctions-like move, is counter-productive. North Korea, it seems, already has nuclear launch capacity and this is not a new phenomenon. The trend started in 2008 in nuclear-related dual-use goods and, during the process of Kim Jong Un’s accession, imports of propulsion equipment started to increase (Figure 3).

 

Figure 3           Value of North Korea’s trade in selected dual-use goods, 1996-1997, $USm)

Source             Equant Analytics, 2017

There are already signs that North Korea is winning the deterrence war. Their calculation is that both China and the US are “paper tigers”: they can bluster, but in the end there is little that they can materially do. There are no clear diplomatic or military answers – all have unimaginable consequences and are therefore likely to be avoided if possible. Accepting North Korea as a nuclear power will be a tough pill for the US to swallow and again is unlikely without some form of diplomatic ‘victory.’

But what is absolutely clear is that economics solutions may well be equally as unimaginable. Loose words in military terms may increase the risk of miscalculation and war as a result. Equal discipline should be applied to the use of language in economic and trade terms. Ending trade with countries who do business with North Korea is impractical and would be an act of assured economic destruction for the US itself. Maybe this is the ultimate deterrence against a trade war with China as well; weaponizing trade cannot be the way forward.

“The Weaponization of Trade: the great unbalancing of politics and economics,” by Rebecca Harding and Jack Harding will be published on the 25th October by London Publishing Partnership. Click here to find out more and to pre-order a copy.