External risks, including political uncertainty in Venezuela, Brexit, trade tensions between China and the US, volatile energy commodity process and swings in financial markets, could affect TT’s economic outlook for 2019. Domestic macroeconomic management, then, will need to be closely coordinated and alert in dealing with a rapidly evolving external landscape. The following is an analysis of the TT economy in the context of global conditions. Reproduced with permission from the Central Bank of Trinidad and Tobago’s Economic Bulletin for January 2019. It has been lightly edited for clarity.
The turbulent global trade environment during 2018 resulted in a loss of global growth momentum in 2018 compared to 2017. The muted expansion in economic activity in 2018 was partly reflective of escalating trade tensions between the US and key trading partners, the uncertainty surrounding the renegotiations of the North American Free Trade Agreement (NAFTA) and the prolonged unpredictability related to the UK’s impending exit from the European Union (EU). Against this backdrop, the International Monetary Fund (IMF) revised downward its 2019 economic growth forecasts for the US, UK, China and Mexico.
Protectionist actions by the US and its largest trading partner, China continue to pose a downside risk to global growth in 2019. The trade dispute between the US and China involved the US imposition of a ten per cent tariff on all aluminium imports, a 25 per cent tariff on all steel imports and a 25 per cent tariff on US$50 billion worth of other Chinese imports. Also, a ten per cent tariff levied on US$200 billion of imports from China was earmarked to be increased to 25 per cent at the beginning of 2019. The sectors targeted by US tariffs include products used for robotics, information technology, communication technology and aerospace. China responded with tariffs of an equivalent amount on US exports, covering goods such as soybeans, pork, fruits, cars and whiskey amongst others.
According to the IMF, global GDP is expected to fall by more than 0.8 per cent in 2020 and remain roughly 0.4 per cent lower in the long run compared to the baseline scenario without trade tensions. The disruption caused by the escalation of trade restrictions could be particularly large in the US and China, with GDP losses of more than 0.9 per cent in the US and over 1.6 per cent in China in 2019. Following the December 2018 G20 summit, a 90-day halt on additional trade measures was agreed upon by the US and China to facilitate trade negotiations.
At the same meeting, the renegotiated NAFTA, renamed the United States-Mexico-Canada Agreement (USMCA), was signed. Although not yet ratified by member countries, the signing of the agreement has lowered a key downside threat to global economic growth. The USMCA will replace the 25-year-old NAFTA, with the biggest changes emanating from rules governing the country of origin, labour provisions, US access to the Canadian dairy market, intellectual property and digital trade, tariff protections, and a sunset clause. Before the signing of the new agreement, the IMF simulated that GDP in the NAFTA trading partners was likely to be more than 1.6 per cent lower in 2020 than in the absence of US tariff measures.
Meanwhile, the uncertain outcome of Brexit has negatively impacted the UK’s business investment in 2018. The UK’s withdrawal from the EU would result in a reduction in its access to the EU market through higher trade barriers as it will no longer be a member of the Single Market trading bloc. In addition, the UK’s ability to export to third party countries under the EU’s negotiated trade deals may also be compromised as the UK will lose access to trade agreements that it had by virtue of being an EU member. However, the net impact on trade will depend on the terms and conditions of the withdrawal agreement. Trade frictions and the lower potential growth of these economies have several implications for TT. Over the period 2011 to October 2018, the US accounted for an average of 38.5 per cent of TT exports while the UK, EU, China and Mexico collectively accounted for an average of 4.4 per cent of TT exports over the same period. As a result, reduced demand for TT exports from these countries can significantly impact the domestic economy. Trade in services (particularly travel services) may also be negatively impacted by reduced external demand since visitor arrivals in TT have been mainly dominated by the US. In addition, the Organisation of Petroleum Exporting Countries (OPEC) noted that the decline in oil prices in October and November 2018 was due, among other things, to slowing global economic momentum amid US-China trade tensions. Lower energy prices could lead to a potential reduction in TT’s export earnings and a deterioration of the surplus on the external current account. TT’s exports may also suffer from the Brexit outcome given that the UK’s growth is anticipated to decelerate post-Brexit, and particularly if the EUCARIFORUM Economic Partnership Agreement is to be renegotiated.
On the other hand, the imposition of tariffs on US goods by China may create opportunities for TT to increase its exports of similar goods to the Chinese market. The Chinese government imposed a ten per cent tariff on US liquefied natural gas (LNG). Of particular interest, China is the world’s second largest natural gas importer, whilst Trinidad and Tobago is in the world’s top ten exporters of LNG. As such, the higher cost of US LNG can push China to substitute to LNG from TT. While TT’s main export commodities continue to be energy or energy-related products, opportunities for the promotion of non-energy exports also exist. Following exports of mineral fuels and chemical products, manufactured commodities represent the third largest category of exports from TT in 2018, with the US accounting for approximately 80 per cent of domestic manufacturing exports. A national thrust into the development of these export categories can facilitate greater sustainability in export earnings for the domestic economy.