According to the Federal Reserve, the Industrial Production Index has been on a slight decline since January 2018 with only a couple of upticks in August and November of last year. Meanwhile, the Census Bureau’s Total Business Inventory-to-Sales Ratio, which was in decline through April 2018, began to rise relatively sharply throughout the rest of that year. It leveled off at a high of 1.4 in May of last year and has remained there since.
This combination of reduced output counterbalanced by increased inventory underlies the uncertainties of the tariff wars for imports and exports. It is not surprising that even the Federal Reserve suggests that the impact of the trade war has a negative impact on the US economy. Expanding that economic strategy to Europe will make matters worse in 2020. Many retailers are passing on the cost impact of tariffs on imports, which will increasingly hit consumers in 2020. There is little benefit in the government revenue from tariffs, which is being squandered on higher subsidies for agribusiness with only a small number of players reaping the benefits.
Meanwhile in Asia, economic indicators are not looking that healthy. Manufacturing operating conditions among members of the Association of Southeast Asian Nations continued to deteriorate in October, according to latest IHS Markit Purchasing Managers’ Index data, with headline figures at a five-year low. Singapore, Vietnam and Thailand, which play an important role in our models, are particularly weak, suggesting that we can expect lower exports from those countries. As a reminder, these are the exporters that have replaced the sharp decline of Chinese exports to the United States.
The “phase one” China-US trade agreement is in an “on-again, off-again” mode as China remains vague on how much the country will increase purchases of US farm goods, considered a critical part of a trade agreement with Washington. A signature on January 15th is not yet a given.
With the new crisis with Iran potentially leading to mutual aggression, the forward outlook on trade is not at all positive. This is reflected in our forecast. 2019 will have seen virtually no volume growth of imports and 2020 is forecast to result in negative growth, highlighting that tariff wars and economic sanctions are not conducive to international trade.