By Winarno Zein*- March 9, 2018
First in The Jakarta Post and accessible at: http://www.thejakartapost.com/academia/2018/03/09/if-trump-starts-trade-war.html
“Trade wars are good, and easy to win,” US President Donald Trump declared in a tweet recently. His tweet was used to justify his plan to slap a 25 percent tariff on steel and 10 percent on aluminum imported to the US.
Trump was the first leader to break a taboo. Given the painful history of the 1930s, when a trade war sent the world economy into the Great Recession, and realizing that free trade and globalization have given the world economy greater prosperity through high and sustained economic growth over the last four decades, it is unthinkable that any leader would think waging a war against these trends is good.
The tariff increase on steel imports might help the inefficient steel industries in Ohio and Wisconsin and secure jobs for their workers, but it might not be good for the US economy as a whole. Many US industries use steel as a raw material: automobile, aircraft, machinery, equipment, construction, consumer durables, you name it. And when steel prices increase, prices of these products will go up as well. Their export would be less competitive, and higher prices would reduce demand domestically that could curb US growth, and with it global economic growth.
Trump’s distaste for free trade has been known all along. Right after he was elected, he decided to withdraw the US from the ongoing negotiations on the Trans-Pacific Partnership (TPP), an effort by 12 countries bordering the Pacific Ocean to create free trade in the region. Trump also vowed to renegotiate NAFTA, the free-trade agreement between Canada, the US and Mexico, which he believes disadvantages the US economy.
Economists generally think that Trump’s view on trade is narrow and simplistic. Trump has a long-held belief that the US runs a trade deficit with countries like China and Germany because the US is being swindled by them.
The real reason, according to economists, is that the US saves too little and consumes too much, and it pays for this bad habit by borrowing from the rest of the world.
If Trump makes good on his threat, the trade partners of the US would not sit idly. They would retaliate, but Trump said that, should the European Union impose tariffs on US products, he would slam tariffs on European cars. As retaliation triggers retaliation and protection spreads, world trade would be less free, and this would inhibit economic growth.
President Trump’s policy that could trigger a trade war would be just another external risk faced by the Indonesian economy. As most Indonesian exports go to China, the impact of Trump’s trade war on the Indonesian economy would depend on the extent to which China’s economy is impacted by the trade war. China itself is not a major steel supplier to the US, but it could be impacted indirectly through the overall impact of a global slowdown.
The Indonesian economy is bracing for the risk of tightening by the US Federal Reserve, which under its new chairman Jerome Powell tends to be more hawkish in its monetary policy. As the US economy keeps strengthening, the possibility of accelerated monetary tightening by the Fed is getting more real. For Indonesia, this could pose a threat for capital flows and rupiah exchange rates.
With external risks mounting, it is important for the government to be more vigorous in strengthening its macroeconomic fundamentals to mitigate whatever adverse impacts may arise. At end of 2017, some improvements in macro-fundamentals has been apparent. Economic growth was 5.07 percent in 2017, the highest in three years. Growth in government expenditure remained weak, but growth rates for investment and exports were the highest since 2014. Export bounced back to US$168 billion after declining for two years, resulting in a trade surplus of $11.5 billion, 30 percent higher than in 2016. Excluding oil and gas, the trade surplus reached $20 billion, the highest since 2011.
Although the current account deficit widened slightly to $17.3 billion, it was equal to 1.7 percent of the gross domestic product (GDP), lower than the 1.8 percent in the previous year. Strong capital inflows in 2017 more than covered the current account deficit, resulting in a balance of payments surplus. At the end of 2017, Indonesia’s external reserve reached $130 billion, $14 billion higher than in December 2016. Improvement in the balance of payment structure was noted as the flow of foreign direct investment (FDI) was more than enough to cover the current account deficit. The balance of payments is considered healthier when it relies less on volatile portfolio investment flows and more on steady FDI.
These seemingly solid indicators lend some sort of resilience to the economy. In February, Wall Street stocks experienced a big sell-off, resulting in a significant fall of more than 4 percent. Stock prices in Tokyo, Hong Kong and Shanghai plunged between 4 and 5 percent. But the Jakarta Composite Index (JCI) only suffered a minor correction of 2 percent.
But this situation could change. Regional elections and national elections — including a presidential election — will be held this year and next. Jockeying by political parties has started at all levels from the national through to the district level. As sectarianism deepens, some political observers have predicted that the election this time will be the most divisive yet, which could result in protracted political and social conflict in the country.
Amid this noisy political game, President Joko ‘Jokowi’ Widodo has also started his political maneuvering to consolidate his political power and garner support for his reelection. If the political temperature continues to rise, there is a risk that that government focus would distract from improving the economy.
This could undermine government efforts to forestall adverse external risks, including the spillover impact from a possible trade war declared by Trump.
*The author is a commissioner in a publicly listed oil and gas service company.
