LONDON: “No man is an island entire of itself”, the English poet John Donne observed in the 17th century.
Donne could easily have been describing the highly integrated global economy of the 21st century, where the slackening in the business cycle is spreading around the world through the arteries of international commerce.
Fallout from the US-China trade war and other sources of business uncertainty is spreading through the dense network of trade and investment links across Europe and Asia and spilling over into emerging markets.
Incoming data show manufacturing and trade are slowing or even contracting in most of the advanced economies as well as commodity exporting countries in Africa, Latin America and the Middle East.
So far, the United States itself, the source of much of this business uncertainty, has remained relatively immune, emboldening policymakers to press their perceived advantage in the trade war.
The country is partially insulated by the closed nature of its continent-sized economy, which is much larger and more inward-looking than other major trading nations.
Combined imports and exports were equivalent to just 27 per cent of gross domestic product (GDP) in 2017, less than half the average for all OECD members, according to the World Bank.
Trade as a share of GDP was much higher in Japan (35 per cent), Australia (43 per cent), the United Kingdom (61 per cent), Korea (63 per cent) and Germany (87 per cent).
The United States is also much less open than major emerging economies such as China (38 per cent), India (43 per cent), Saudi Arabia (67 per cent) and Mexico (80 per cent).
Even so, the United States is not entirely closed, and the disparity between growth at home and abroad is fuelling a rapid increase in the trade deficit as well as a slowdown in domestic manufacturing.
Most indicators point to a sharp deceleration in US domestic manufacturing and construction growth compared with 2018, and an associated slowdown in employment creation in these sectors.
At the same time, US exporters are being hit by the slowdown in overseas markets and US import-competing firms face an increasing flood of cheap imports with nowhere else to go.
The economy’s relatively strong performance and interest rate differentials are driving dollar appreciation – undermining the competitiveness of US exporters and import-competing firms even further.
The strong dollar has helped keep inflation in check, despite tariffs on imported items and very high levels of employment, but it is hitting international competitiveness.
As a result, the trade deficit worsened to an average of US$53 billion per month in the three months from March to May, up from US$47 billion in the same period last year and just US$39 billion in 2016.
The deficit has continued to widen despite the proliferation of tariffs imposed on imports from China and other trading partners intended to slow the tide of incoming merchandise.
Previous periods when the United States has grown faster than its trading partners have usually been accompanied by a ballooning trade deficit, so the widening gap was both predictable and predicted.
Policymakers have few good options. Imposing tariffs on an even wider range of items would push up prices, raise costs for US manufacturers, and depress real incomes for US consumers.
Cutting interest rates to depreciate the dollar would risk pushing up import prices, boosting growth in an economy already operating at full-employment, accelerating inflation, and triggering another financial bubble.
So the trade war, by hitting growth in major trading partners, is gradually rebounding on the United States through a worsening external position and the deteriorating competitiveness of US businesses.
In the long run, US policymakers may consider the cost worth it if the economic war entrenches superiority over China. In the short run, however, the war is weighing on growth at home as well as abroad. — Reuters
John Kemp is a Reuters market analyst. The views expressed are his own.