2 September 2019

Economics Trade turbulence Global

Ten key questions now

 The world is facing exceptional trade turbulence Doug Lippoldt Chief Trade Economist and uncertainty... HSBC Bank plc douglas.lippoldt@hsbc.com  …including the US-China trade dispute, Brexit, a new +44 20 7992 0375 NAFTA, and tensions between Japan and South Korea Janet Henry Global Chief Economist HSBC Bank plc  This note takes stock of the key issues and their [email protected] economic impact +44 20 7991 6711 Ryan Wang US Economist HSBC Securities (USA) Inc. An end-of-summer stocktaking [email protected] +1 212 525 3181 We are at a crucial juncture in the evolution of world trade. This report looks at ten Qu Hongbin current questions on the future of trade, drawing on insights from HSBC economists Co-head Asian Econ Research, Chief China Economist The Hongkong and Shanghai Banking Corporation Limited from around the globe. It provides a broad survey of the most important issues and [email protected] their economic implications via succinct two-page summaries. For readers wanting +852 2822 2025 deeper coverage on any particular topic, we provide a series of links to Joseph Incalcaterra Chief Economist, ASEAN recent reports. The Hongkong and Shanghai Banking Corporation Limited [email protected] Ten questions on trade +852 2822 4687 1. How is global growth being impacted by the US-China trade dispute? (p. 2) James Lee Economist The Hongkong and Shanghai Banking Corporation Limited 2. Which parts of the US economy are being hardest hit? (p. 4) [email protected] +852 2822 1647 3. How is China being affected and how is it responding? (p. 6) Elizabeth Martins Senior Economist 4. What is the impact of the dispute on ASEAN economies? (p. 8) HSBC Bank plc [email protected] 5. Trade tensions are growing between Japan and South Korea – what impact are +44 20 7991 2170 these having, particularly on global electronics supply chains (p. 10) Chris Hare Economist 6. What impact will a 'no deal' Brexit have: HSBC Bank plc [email protected] a) On the UK, including long-term, post-Brexit prospects? (p. 12) +44 20 7991 2995 Shanella Rajanayagam b) On Europe (p. 14) Trade Economist HSBC Bank plc 7. Will the US impose additional tariffs on automotive exports? (p. 16) [email protected] +44 20 3268 4118 8. Where are we with the ratification of the updated NAFTA agreement, that is, the

US, Canada and Mexico Agreement? (p. 18) 9. Will the World Trade Organization survive the current trade turbulence? (p. 20)

10. Will trade liberalisation ultimately triumph over protectionism? (p. 22)

Disclosures & Disclaimer Issuer of report: HSBC Bank plc This report must be read with the disclosures and the analyst certifications in View HSBC Global Research at: the Disclosure appendix, and with the Disclaimer, which forms part of it. https://www.research.hsbc.com

Economics ● Global 2 September 2019

Impact of US-China trade dispute on global growth

 Globally, investment has been the major casualty of the trade wars

 Collateral damage on third countries’ exports has so far been mixed depending on trade partners, product mix and ease of substitution

 Plenty more tariff and growth risks before end-2019

Janet Henry Industry, investment and trade all heading down Global Chief Economist HSBC Bank plc The divergence between the sharp global industrial downturn and the more resilient service [email protected] +44 20 7991 6711 sector has been a major feature of the slowdown in global growth over the past year or more. While sector-specific stories, such as autos and semiconductors, have played a key role in the slowdown in global production and trade, the other main driver has been a general weakness in investment, driven in large part by steadily escalating trade actions. Cross-border investment has been one of the major casualties, amid concerns about supply chains and future demand as companies wait to assess the impact on the US, China and third countries.

Chart 1. Downturn in global industry… Chart 2. …investment and trade deepens

Index World PMI Index % Yr World % Yr 58 58 6 6

56 56 5 5

54 54 4 4

52 52 3 3 50 50 2 2 48 48 10 11 12 13 14 15 16 17 18 19 1 1 Manufacturing - Headline Services - Headline 2012 2013 2014 2015 2016 2017 2018 2019 Investment Exports Consumption Axis Title Source: Refinitiv Source: Refinitiv

China has so far responded directly to the US tariffs in several ways to try to limit the impact on its own economy. Most notably, it has cut tariffs on products imported from other countries. Until the latest round of reciprocal tariffs, Beijing had managed to exclude some of the more important products that China imports from the US.

As the next round of new tariffs and tariff rises take effect (on 1 September, 1 October and 15 December), import demand from the world’s two biggest sources is likely to be weaker. Some countries are obviously exposed very heavily to their neighbours (Chart 3), notably Chile, Korea, Brazil and Japan, but product mix matters too.

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Chart 3. Some markets have a high direct exposure to both the US and China – but not many 30 Mexico (2, 80) Canada (5, 76) Colombia 25

20 Japan

India Philippines 15 Switzerland Chile UK Brazil Korea Thailand Italy Indonesia 10 Germany New Zealand France Malaysia Hong Kong (8, 55) Turkey Saudi Arabia Sweden South Africa Singapore 5 Norway Share of exports to the US (% total) (%thetoUS exports of Share Argentina Australia Poland Spain Russia

0 0 5 10 15 20 25 30 35 40 Share of exports to China (% total) Source: IMF DOTS

Collateral damage influenced by product mix The US and China are very different markets when it comes to their import mixes. China’s import mix is much more heavily skewed towards crude materials compared to the final manufactured goods for the US, while both are big importers of machinery and chemicals. Some countries are big exporters of products that both the US and China import, notably Korea, Mexico, the Philippines, Japan, Czech Republic, Malaysia, Germany, Russia and Sweden. These countries, particularly Germany, could therefore be at risk of job losses and weaker consumer spending if industry does not stabilise. In contrast, some countries, including Mexico and Vietnam, are well-placed to pick up the pieces from any substitution and, over time, rejigging of supply chains to other suppliers of these products.

Global growth continues to slow As the US and China trade actions are implemented, our forecasts continue to edge lower. Our latest global forecast revisions incorporate the tariffs already implemented and assume no complete resolution or escalation of the US-China trade battle. On that basis, our 2019 global GDP growth forecast has edged down to 2.3% with a further slowdown to 2.2% in 2020. But, with trade uncertainties still heightening, the risks are still heavily skewed to the downside, as reflected in the inverted yield curves in the US and elsewhere.

Plenty more tariff risks before end-2019 Other US trade actions may be pending before the end of 2019. First, there is the possible imposition of tariffs or other measures on US imports of autos and parts by November 2019 under an ongoing US national security case. Secondly, the US government is reviewing its policies with respect to information and communications technologies. Thirdly, new countries could face the threat of tariffs, with Vietnam the latest to be quoted by the US President.

We also note that it is not just about the US and China. Many countries have made a number of harmful trade interventions over the past year or so. The US and India top the list but a whole host of emerging economies have too.

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Which parts of the US economy are being hardest hit?

 Manufacturers are among those that have been most exposed to increased tariffs on key imports

 Tariffs have had more impact on business investment than on consumer spending…

 …but new tariffs cover more categories of consumer goods

Ryan Wang New tariffs, new risks US Economist HSBC Securities (USA) Inc. Up to this point, we believe the successive rounds of tariffs imposed on US imports from China [email protected] +1 212 525 3181 have had more of an impact on business decisions than on consumer spending. This is not only because previous lists of products facing new tariffs were skewed toward capital equipment and intermediate inputs but also reflected the underlying composition of US imports from China. According to the San Francisco Fed, imports from China represent 5.4% of the effective cost of business fixed investment purchases (non-residential fixed investment price index) but only 1.7% of the cost of US consumer expenditures (PCE price index)1. The table below shows the various tariff actions that are already in effect or that are scheduled to become effective. Collectively, these tariff lists encompass nearly all US imports from China.

Table 1. Section 301 tariffs on US imports from China Effective date Tariff rate Approximate value of annual US imports affected USD34bn Trade Action (List 1) 6 July 2018 25% USD31bn USD16bn Trade Action (List 2) 23 August 2018 25% USD15bn USD200bn Trade Action (List 3) 24 September 2018 10% USD182bn Increase in tariff rate from 10% to 25% on List 3 10 May 2019 New rate: 25% USD182bn

USD300bn Trade Action (List 4) List 4A 1 September 2019 15% USD111bn List 4B 15 December 2019 15% USD156bn

Increase in tariff rate from 25% to 30% on Lists 1-3 1 October 2019 New rate: 30% USD228bn Source: US Trade Representative, Census Bureau, HSBC In the first column, each trade action is labelled by the approximate value of imports affected as per the US Trade Representative's announcements. In the final column, we estimate the approximate value of products affected based on 2018 import data from the Census Bureau.

1 Federal Reserve Bank of San Francisco, Inflationary Effects of Trade Disputes with China, 25 February 2019

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Trade tensions can affect the economy to the extent that they lead businesses to delay making new investments. In July last year and again this January, the Atlanta Fed asked nationwide firms whether they were reassessing capital expenditure plans due to tariff hikes and trade policy tensions. In January, 20% of firms said they were reassessing their investment plans. Roughly half of this group said that they had either postponed or cancelled capital expenditures.

The Atlanta Fed's survey shows that goods producers have been more likely than service providers to reassess their investment decisions as a consequence of trade tensions.2. A greater share of manufacturers in particular have been reviewing their investment decisions, likely a reflection of the types of products on which new tariffs have been imposed since last summer. Within the service sector, businesses in the retail trade, wholesale trade, transportation, and warehousing industries may be among those most likely to see an impact from currently imposed or pending tariffs.

Chart 4. Some of the industries most exposed to tariffs include manufacturing and retail trade Survey of Business Uncertainty: % of firms reassessing capital expenditure plans due to tariff hikes and trade policy tensions

All firms

Goods producers

Service providers

Manufacturers Retail trade, wholesale trade, transportation, and warehousing 0 5 10 15 20 25 30 35 July 2018 January 2019

Source: Survey of Business Uncertainty conducted by the Federal Reserve Bank of Atlanta, Stanford University, and University of Chicago Booth School of Business

One risk is that with new rounds of tariffs, more firms will begin to re-evaluate their investment plans. The newly scheduled tariffs cover more categories of consumer goods and are therefore likely to affect a broader cross-section of companies. The tariffs effective on 1 September, for example, affect many different types of clothing, footwear, and home furnishings. The businesses that import these products will need to pass along the increase in costs to the end customer, absorb some of the impact through reduced profit margins, or search for alternative suppliers. Although the final outcome is likely to involve a combination of all of these strategies, we expect that in many instances competitive pressures will result in businesses being reluctant to pass along higher costs for these types of retail goods. As the tariffs affect more businesses, more investment decisions could be at risk of being delayed or cancelled (see US Economic Outlook: Trade risks in focus, 25 August 2019).

2 Federal Reserve Bank of Atlanta, Tariff Worries and US Business Investment: Take Two, 25 February 2019

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Escalating trade dispute raises slowdown risks in China

 China-US trade tensions are becoming more intense and protracted, presenting fresh risks to China’s exports and business investment

 New escalations present an additional 0.8ppt drag on growth over a 12-month period, though policy easing offsets some of this impact

 Beijing will likely step up both fiscal and monetary easing, but in a gradual and selective fashion

Qu Hongbin How the trade dispute is weighing on China’s growth Co-head Asian Econ Research, Chief China Economist The Hongkong and Shanghai The impact on the economy Banking Corporation Limited The trade dispute has dragged on for 18 months, far longer than most people anticipated. Given [email protected] +852 2822 2025 the escalation over the last few weeks, which saw further increases in tariffs on China’s exports

Julia Wang to the US, the likelihood of reaching a resolution any time soon seems to be low. The tensions Senior Economist, Greater China have spilled over beyond trade and are spreading to currency, technology, and investments, The Hongkong and Shanghai Banking Corporation Limited creating further challenges to China’s growth (see China GDP downgrade, 29 August; [email protected] Disorderly escalation increases downside risks, 26 August). As a result, we recently lowered our +852 3604 3663 GDP growth projections for 2019 and 2020 to 6.2% and 5.8%, from 6.5% and 6.3% previously, Erin Xin Economist, Greater China after factoring in additional policy easing. Our base case is that the trade dispute will not be over The Hongkong and Shanghai before the end of the year. Banking Corporation Limited [email protected] +852 2996 6975 The impact on China’s economy is clear. We estimate that the tariffs imposed on all of China’s exports to the US (approximately USD495bn based on 2018 values) will have a 1.6ppt drag on GDP growth over a 12-month period, to which the latest escalations contribute 0.8ppt

(see Chart 5). This will continue to undermine business confidence and, in turn, appetite for investment (see Trade war wounds, 9 August). Employment will also come under pressure and we estimate 1.8m manufacturing jobs may be lost in China. This is equivalent to around a 1.6ppt loss in total manufacturing employment, or a 0.4ppt loss in total urban employment (see China GDP downgrade, 29 August).

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Chart 5. Tariff tracker on growth impact

$50Bn List 0.1 (appx $46Bn) ppt. 25% tariffs

0.8 ppt $50Bn List $200Bn List (appx $46Bn) (appx $182Bn) 25% tariffs 25% tariffs $300Bn List

$250Bn List List 4A List 4B 1.3 (appx $228Bn) (appx $111Bn) (appx $156Bn) ppt 25% tariffs 10% tariffs 10% tariffs 1 September 15 December

$250Bn List List 4A List 4B (appx $228Bn) (appx $111Bn) (appx $156Bn) 1.6 30% tariffs 15% tariffs 15% tariffs ppt 1 October 1 September 15 December

0 100 200 300 400 500 600 Value of Chinese goods impacted (USDbn)

Note: The amount and GDP impact are cumulative; Approximate values are based on calculations of 2018 US import value from the US Census Bureau. Source: US Census Bureau, HSBC

Policy response: easing will help but measures will remain moderate What will China do in response to offset the impact on growth? We have argued previously that both monetary and fiscal policy measures as well as structural reforms can help provide relief (see Trade war: A winning strategy, 26 June), and we expect stimulus to continue. From a monetary policy perspective, recent interest rate reform using the LPR (loan prime rate) provides more room to lower interest rates for the private sector (see China’s interest rate reform, 19 August), and we expect 100bps cuts in RRR (reserve requirement ratio) this year and next year. On the fiscal side, given the relatively low level of central government debt, there is ample room for additional tax cuts and a higher quota for the issuance of local government bonds. Other tools such as household registration reform and a moderate depreciation of the RMB may also help to offset some of the impact. We estimate the combination of these policy measures can help to offset around half of the latest 0.8ppt impact on growth.

Even in the face of external pressure pulling down growth and domestic demand showing signs of sluggishness, we think China will hold back from launching a super stimulus package. This is because macro-prudential concerns around debt remain a priority for policymakers and may act as a constraint. Policymakers recently said they want to keep the housing market from being used for speculation and to rein in local government borrowing. Instead, more efforts will be directed towards supporting domestic demand and infrastructure investment (see China Politburo meeting, 31 July). In all, we think policy easing will continue but remain on the moderate side.

7 Economics ● Global 2 September 2019

Opportunities for ASEAN

 As a region highly interlinked with regional supply chains, ASEAN is not immune from US-China trade tensions

 However, the region is already benefitting from supply chain diversion, in particular Vietnam, Malaysia, Thailand, and Indonesia

 The fact that the region continues to pursue both intra-ASEAN and extra-ASEAN trade liberalisation adds to its trade competitiveness

Joseph Incalcaterra How is ASEAN impacted by the trade dispute? Chief Economist, ASEAN Since the beginning of the trade dispute, the immediate impact has been undeniably negative The Hongkong and Shanghai Banking Corporation Limited (ASEAN Perspectives: Trade wars: Much pain, some gain, 29 September). Take the electronics [email protected] +852 2822 4687 sector: ASEAN is highly involved in the regional semiconductor chain. Singapore and Malaysia host various semiconductor foundries, with the supply chain also running through the Noelan Arbis Economist Philippines, Thailand, and Vietnam. A large share of these chips make their way to mainland The Hongkong and Shanghai Banking Corporation Limited China where they are embedded in assembled electronic products. The latest escalation in [email protected] US-China trade tensions will directly impact electronic goods, thus increasing the growth risks +852 2822 4325 (ASEAN Perspectives: Trade wars: this time is different, May 2019). And it’s not just about Yun Liu Economist electronics: various other manufacturing sectors such as machinery are similarly impacted. The Hongkong and Shanghai Banking Corporation Limited Supply chain diversion? [email protected] +852 2822 4297 This brings us to the argument of supply chain diversion: the concept that firms will re-tool their supply chains to avoid tariffs. This can be done by shifting the site of final assembly to a place

not impacted by tariffs – such as Southeast Asia. However, barring a few specific sectors such

as hard disk drives where single firms have multiple final production sites across both China and Southeast Asia (see: ASEAN Perspectives: Trade wars: collateral damage? July 2018) between which they can shift production, most do not have such flexibility. As a result, in order to have supply chain diversion, firms have to boost capex, typically in the form of new FDI commitments. Moreover, it’s not just about final assembly – firms have to ensure enough of the value-add is from outside of China to avoid running into issues with rules of origin.

Is it happening? The sheer size of China’s industrial complex, and dominance across various sectors including most consumer electronics assembly, means that a large share of diversion is not likely to happen any time soon. That said, many firms have publicly announced, and in some cases, already acted on plans to shift production from China to Southeast Asia. Samsung, LG, Sony, and Google have all announced plans to do this. Vietnam has by far been the largest beneficiary of this – largely because firms like Samsung have already shown that the country can become a reliable base for assembling consumer electronics.

Focus on FDI High-frequency FDI data is already showing a strong increase in FDI inflows in Vietnam, Malaysia, and Singapore – countries that had already been seeing strong inflows (see: ASEAN Perspectives: Keeping up with FDI, August 2018). We believe FDI is the key variable to look

8 Economics ● Global 2 September 2019

out for in deciphering whether these countries will gain market share from China. In particular, we would focus on economies such as Indonesia and the Philippines, which historically receive a low share of regional manufacturing FDI, but should benefit from the ongoing trade tensions due to low labour costs and inter-connectivity with industrial supply chains across ASEAN.

More than labour costs With the exception of Singapore, ASEAN compares favourably with China when it comes to labour costs – particularly Vietnam, the Philippines, and Indonesia. But there’s much more to manufacturing competitiveness than labour costs. Indeed, ASEAN compares less favourably when it comes to ease of doing business, electricity costs, and logistics costs. However, the countries with the most pressing infrastructure problems ‒ Indonesia, the Philippines, and Vietnam ‒ are pro-actively addressing their infrastructure deficiencies (see: ASEAN Perspectives: The next investment cycle, July 2019; and Vietnam at a Glance: Can’t take eyes off infrastructure, August 2019) partly by attracting a wider array of financing options for infrastructure (see: ASEAN Perspectives: Re-assessing Belt and Road, December 2018).

Meanwhile, governments are pursuing reforms to boost competitiveness in other areas such as tax and bureaucracy, in particularly Indonesia (see: Escaping the 5% trap: Indonesia’s task ahead, 28 June), and the Philippines (see: Sick man no more: Sustaining the Philippine growth story, 27 February 2018).

ASEAN angle Then there is the ASEAN angle. As a region, ASEAN is driving the Regional Comprehensive Economic Partnership (RCEP), and pursuing intra-regional integration, in particular in the banking and e-commerce sectors (see: ASEAN in 2018: A land of contrasts, 8 January 2018). This helps firms based in any ASEAN member nation take advantage of the region’s strong consumer base (see: ASEAN Perspectives: Consumption nations, 13 February 2019). Furthermore, countries like Vietnam and Indonesia are pursuing bilateral trade liberalisation through signing free-trade deals (with the EU and Australia, respectively). This boosts the appeal of ASEAN in an era of heightened global protectionism.

In short? ASEAN is far from immune from the current depressed trade environment. Trade-intensive economies such as Singapore will continue to feel the pain from slowing exports. However, more broadly, the region is benefitting from trade and supply chain diversions.

9 Economics ● Global 2 September 2019

Japan-Korea trade tensions

 Geopolitical tensions are rising between the two East Asian countries, which has led to Japan imposing export controls against Korea

 As this is not an export ban, it will have limited impact on Korea’s industrial production unless key materials are blocked from shipping

 It could be a lose-lose situation, however, in the longer run, as it could hurt the credibility of the two economies

James Lee Breaking bad Economist The Hongkong and Shanghai Banking Corporation Limited Japan’s export regulations against Korea could disrupt global supply chains [email protected] Trade tensions are rising in East Asia, with Japan announcing export controls against Korea of +852 2822 1647 three critical materials used for semiconductor and OLED production in early July. More Ki-Hyuk Lee recently, Japan has removed Korea from its whitelist of preferred trading partners on 28 August, Economist, Asia The Hongkong and Shanghai which means that Japanese firms will have to obtain approval from the Ministry of Economy, Banking Corporation Limited Trade, and Industry (METI) to export strategically sensitive products (e.g. related to weapons). [email protected] +852 2822 4523 Our estimates show about 2% of Korea’s imports are exposed to Japan in a meaningful way, which we define as more than 70% from Japan.

These developments have raised concerns of a potential disruption of Korea’s semiconductor production, given the industry’s reliance on Japanese materials. Korea relies heavily on Japan to source resist and hydrogen fluoride (more than 90% and 70%, respectively) to manufacture semiconductors. In fact, Japanese suppliers have 100% market share in ultra-high purity and high quality hydrogen fluoride used for wafer cleaning and etching (Asia technology: Mixed impact from Japan’s lockdown on materials exports, 12 July 2019). This could be damaging to the Korean economy, given that semiconductors accounted for 21% of total exports last year and have been a key growth driver. Moreover, semiconductor shipments have turned up in volume terms since late Q1 2019, after a sharp fall late last year. Chart 6. Korea’s semiconductor export volumes have started to rebound since late Q1 2019

70 60 50 40

30 mma

3 20

y, y, -

o 10 -

0 % y % -10 -20 -30 -40 2013 2014 2015 2016 2017 2018 2019 Semiconductor exports Volumes Price

Source: CEIC, HSBC

10 Economics ● Global 2 September 2019

Any interruption in Korea’s semiconductor output will also have global repercussions, as the country accounted for about three-quarters of global DRAM and half of global NAND production last year.

More bark than bite, but with lingering risks That said, we believe the immediate impact is limited in the near term. Most importantly, we note that export controls do not mean a ban but rather a requirement for approval from METI before shipments are made. In fact, neither Taiwan nor China is on Japan’s whitelist. This means, however, that Korean companies will have to make orders in advance, given the time it takes for exports to be approved. According to METI, the standard processing period is 90 days after filing an application, but it generally takes two to three weeks. The average processing time is seven days for whitelist countries, according to Korea Security Agency of Trade and Industry.

However, geopolitical tensions are showing little sign of de-escalation. On 22 August, the Blue House3 announced that it will not extend the intelligence-sharing pact (GSOMIA) with Japan. As such, large downside risks to the Korean economy, particularly semiconductor production, cannot be fully ruled out. According to the Korea Institute of International Economic Policy, a 10% decline in semiconductor production would shave as much as 0.44% from Korea’s GDP.

All said, trade tensions between Korea and Japan are likely to have a limited impact on global supply of semiconductors unless tensions escalate to a level where they disrupt shipments of key materials from Japan. However, the tail risks could have damaging implications for the Korean economy, given its large reliance on the semiconductor industry.

A lose-lose situation in the longer run If the situation turns out to be a more prolonged phenomenon even without any disruption of production, it is likely to have negative implications for both economies. For Korea, the risk of any disruption in production itself will likely have semiconductor buyers attempting to diversify their supply of chips to other countries, potentially resulting in lower global market share. Meanwhile, for Japan, alternative suppliers can emerge and materials localisation can pick up in Korea from the current 50.3% as of 2017. Indeed, the Korean government is trying to alleviate any potential disruption from Japan’s export controls, allocating KRW273bn of this year’s supplementary budget to support R&D.

3 The Blue House is the executive office and official residence of the President of South Korea.

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Beyond a 'no deal' Brexit

 Beyond the short-term disruption, a 'no deal' Brexit could open up scope for new trade deals and other reforms

 That is the vision. However, the reality may be messier

 Trade deals could take years, and while some governments might cut taxes and deregulate, Brexit might allow others to do the opposite

Elizabeth Martins Bold vision, messy reality Senior Economist HSBC Bank plc The economic case for 'no deal' [email protected] +44 20 7991 2170 For those in favour of the UK leaving the EU with 'no deal', there may be short-term disruption, but this should easily be outweighed by the long-term opportunities. New trade deals, they argue, will offset any lost access to the EU, which, in any case, should be minimal. Indeed, by going it alone, the UK should in theory be able to tailor trade deals to suit the make-up of its own economy, as opposed to those of 28 nations with different and competing interests. A number of countries have expressed enthusiasm about doing a deal with the UK, the US perhaps most notably, with President Donald Trump having said there was "tremendous potential to make up more than the difference [of any losses in UK-EU trade]."

It should also have some greater scope to adjust tariffs, regulations, taxes and procedures to improve competitiveness. Certainly in comparison with a softer Brexit, the UK would have more flexibility with 'no deal'. Adding in the UK's long-held structural strengths ‒ its business environment, infrastructure, global reputation and labour force ‒ and this should stand the country in good stead for a wave of inward investment.

Back down to earth That is the vision. The reality, though, looks considerably messier. Over half of UK trade in 2018 was with the EU (49% of exports and 54% of imports), with a further c.11% accounted for by countries that have free trade agreements with the EU, from which the UK might no longer benefit. (Admittedly, the UK has negotiated to replicate some trade deals, including with South Korea and Switzerland.)

Any disruption to trade from a 'no deal' Brexit would likely disproportionately hit exports, rather than imports. After all, the UK's plan in a 'no deal' Brexit is to cut its own import tariffs to zero for 87% of goods. In theory, this is a temporary measure to ensure uninterrupted goods imports from the EU. But the EU has not said it will return the favour (indeed under most favoured nation rules, to do so for the UK would mean slashing its tariffs for all WTO members). So UK exports going into the EU would face tariffs while goods from around the world (with certain exceptions ‒ largely meat, dairy and cars) would be able to enter the UK with ease.

If the UK does not do a new deal with the EU, and export volumes to Europe fell, then just to break even would require a significant acceleration in export growth to non-EU markets at a time when global trade is doing the opposite. And the acceleration would be from an already decent pace of growth. Of the 53% growth in UK goods exports to non-EU partners between 2008 and 2018, those to the US grew 36% and those to China grew 293%.

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Admittedly this was from a low base, but they still made the two biggest contributions to growth over that period (7.7ppts and 4.9ppts respectively).

As long as the UK is free to control its own tariffs and regulations, then new trade deals should be possible to help accelerate this... eventually. But in this context, it might well prioritise doing a deal with the EU. This might require tariff and regulatory alignment that would compromise any new deals (as well as reviving the thorny issues of the financial settlement and the Northern Irish border).

As well as being complicated by any UK-EU alignment, new arrangements with other partners could take a long time to complete and might end up being more favourable to new partners than to the UK, particularly if the temporary tariff cuts are still in place, which would leave the UK with little to offer potential new partners. They might also involve changes to standards that prove controversial. For example, the US may seek access to the UK for chlorine-washed chicken or hormone-treated beef, which have been banned under EU rules. The UK media frequently cites concerns that a free trade deal including the service sector could allow overseas firms to win contracts with the treasured National Health Service.

As well as these complications, the greater distance of course means trading with new partners might be more costly than with the UK's European neighbours, so a new trade deal would have to be disproportionately favourable to the UK to make up for the additional costs.

Meanwhile, although Conservative ministers have frequently alluded to a Singapore model of deregulation and tax cuts for a post-Brexit UK, these are not guaranteed. Apart from the fact that the UK has a much higher spending bill than Singapore (due to its much larger population and welfare state), the country is unlikely to unify behind this vision anyway. A Labour government could take the opposite stance if elected. EU restrictions on state aid would no longer apply, for example, allowing a larger state subsidy spend. Reduced levels of inward migration are also hardly consistent with the Singapore model. If companies faced higher costs and administrative burdens to meet their skilled and unskilled labour needs, they might look to base operations elsewhere.

Ultimately, new freedoms and flexibility would likely emerge from a 'no deal' Brexit, but so too would formidable challenges.

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'No deal' Brexit and Europe

 A 'no deal' Brexit might have material, but perhaps not recessionary, implications for the rest of Europe

 Some countries and sectors would take a bigger hit than others – Irish agriculture and German autos are sectors to watch

 The ECB might be tipped into a more aggressive round of monetary stimulus

Chris Hare Cars, cows and beyond Economist A 'no deal' Brexit is a clear risk to the rest of Europe, but not one that would necessarily drag the HSBC Bank plc [email protected] eurozone into recession. That view reflects the degree of the EU's trade exposures to the UK – +44 20 7991 2995 material but not enormous. EU27 exports are worth around 3% of its GDP (Chart 7).

But some countries and sectors are more exposed than others. Irish exports to the UK are close 4 to 10% of its GDP. Belgium and the Netherlands also export heavily to the UK. And as we argued in Brexit and the EU: Implications of 'no deal' for the eurozone (2 September 2019), there are various sectors to watch, including Irish agriculture (beef in particular) and German cars. Both export heavily to the UK, and would be subject to significant UK import tariffs.

Chart 7. EU exports to the UK are worth Chart 8. We think 'no deal' Brexit could 3% of its GDP, but exposures vary by knock around 0.3ppts off 2020 eurozone country growth

% GDP Exports to UK (2016) % GDP Impact on Current 2020 12 12 2020 growth growth forecast Eurozone -0.3 1.1 10 10 o/w trade disruption 0.0 8 8 o/w a UK recession -0.1 6 6 o/w FX effects -0.1 o/w sentiment -0.1 4 4 Germany -0.3 1.1 2 2 France -0.2 1.0 0 0 Italy -0.1 0.5 Spain -0.2 1.9 Ireland -1.2 3.4

Italy

Spain

Ireland

France

Belgium

Germany Total EU27 Total

Services Netherlands Goods Source: ONS, Refinitiv Datastream, HSBC calculations Source: HSBC estimates

4 The export data for Belgium and the Netherlands might be upwardly biased due to the 'Rotterdam effect', where goods leaving these Dutch/Belgian ports are registered as exports, even though the goods came from another country first.

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A 'no deal' Brexit scenario If trade barriers persist after a 'no deal' Brexit, growth in EU trade, productivity and GDP might be perpetually weaker – if perhaps only marginally – than under a 'soft' Brexit deal, as both sides bed into their new trading relationship.

But perhaps the biggest risks relate to disruption in the short to medium term. Overall, we think there are five potential headwinds to consider: (i) trade disruption (ii) a possible UK recession (iii) weaker UK demand due to a likely fall in the pound (iv) confidence effects (v) banking sector spillovers. Taken together, a 'no deal' Brexit would knock 0.3ppts off eurozone growth in 2020 (our current forecast stands at 1.1%). But given differing exposures to the UK, some countries are likely to see a bigger hit than others. While the Big 4 eurozone economies might see a similarly mild impact, Ireland could see a much bigger drag on growth (Chart 8).

There is a risk that the impact might turn out to be larger than our fairly mild scenario, particularly if a 'no deal' Brexit begins to drag significantly on economic sentiment or, even more worryingly, if it begins to adversely impact financial conditions.

We also think that a 'no deal' Brexit would be mildly disinflationary over the medium term. Although trade tariffs and other barriers might put upward pressure on firms' costs, a likely fall in sterling (and corresponding rise in EUR-GBP) would put downward pressure on the price of imports from the UK. Weaker aggregate demand, which we expect to exceed the initial hit to supply, might also weigh on prices.

Additional ECB stimulus? Given the likely drag on growth and disinflationary impact of 'no deal', and the risk of particularly adverse spillovers, we think the ECB might be tipped into a looser monetary policy stance. As it stands, our central ECB forecast is for a 20bps cut in the deposit rate in September, to -0.60%, and the re-start of net asset purchases in January, at a purchase rate of EUR30bn per month, lasting for one year (ECB: Determined to act, 26 July). We think that if our central case comes true, the ECB could increase the monthly annual purchase pace above that.

A 'no deal' Brexit might also see increased calls for fiscal stimulus. But we think policy measures will probably be isolated to supporting the most affected sectors and might not have a major macroeconomic impact.

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US auto tariffs

 A US Government investigation this year found that imports of motor vehicle parts threaten US national security, weakening innovation

 The US President decided on 17 May 2019 to allow 180 days for talks with trade partners to resolve the US concerns

 Tariffs and quotas could be imposed to shield the US automotive market from imports, which amounted to ca. USD300bn in 2018

Doug Lippoldt Trouble on the horizon Chief Trade Economist HSBC Bank plc Potential tariff action pending [email protected] +44 20 7992 0375 In a proclamation on 17 May 20195, President Donald Trump announced the findings of the recently completed US “Section 232” investigation into the national security implications of rising US automotive imports (Chart 9). The investigation concluded that auto-sector leadership was important for US national security and that imports threatened to harm relevant US interests (HSBC, US auto trade barriers?, 30 May 2019). The economic pressure that import competition places on US-owned automotive firms allegedly limits their capacity to engage in innovation. To date, the underlying report with the detailed supporting analysis has not been released to the public.

Chart 9. US exports and imports of motor vehicles and parts, USDbn

USD billions USD billions 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0

Exports Imports

Source: UNCTADstat; HSBC. Note: This chart refers to SITC Rev. 3, classification 78, Road vehicles and parts.

On the basis of the investigation, the US President determined a need to limit imports and thereby boost margins for American-owned producers, so they can free up resources to invest in research and development (R&D). As a result, Administration officials have reportedly

5 With respect to trade, a proclamation is a special type of document issued by the US President and typically provides for a policy action like a change in tariffs. Section 232 is a provision of the US Trade Expansion Act of 1962 addressing national security.

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indicated that tariffs of up to 25% could be imposed on imported motor vehicles.6 Before imposing any such measure, the President decided to provide a 180-day window for negotiations with trade partners to determine whether US national security concerns could be addressed via bilateral accords. In similar cases during 2018 concerning US imports of steel and aluminium, the US was able to negotiate with certain partners quantitative restrictions on imports in exchange for waiving Section 232 tariffs. In a further risk of policy action, the President's proclamation of 17 May 2019 also explicitly noted that domestic ownership of production was an important consideration. The invocation of ownership as a concern meant that US action could possibly target foreign firms producing in the US domestic market. That could mark an expansion in the scope covered under Section 232 in comparison to the actions taken in 2018 against steel and aluminium suppliers.

Who is vulnerable? Chart 10 highlights the leading foreign suppliers of motor vehicles and parts to the US market. Thanks to the terms of an exchange of side-letters to the newly renegotiated NAFTA accord, Canada and Mexico are shielded from potential US auto trade measures in relation to this case.7 Based on a statement in the US proclamation, it also appears that Korea is shielded from such action thanks to concessions it made in 2018 in the renegotiation of the US-Korea Free Trade Agreement. This would leave Japan, Germany, China, the United Kingdom and Italy as the most exposed suppliers, in terms of the scale of their exports to the United States.

Chart 10. US imports of motor vehicles and parts, leading suppliers, USDbn USD billions USD billions 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Canada Japan Germany China South Korea United Kingdom Italy Mexico

Source: UNCTADstat; HSBC. Note: This chart refers to SITC Rev. 3, classification 78, Road vehicles and parts.

Next steps At the G7 meeting in Biarritz, France, during 24-25 August 2019, the US President discussed the Section 232 action with leading partners including Japan and EU members. An upcoming US-Japan trade deal was announced, which could potentially provide some shielding for Japan from US auto-sector measures.8 The US President indicated that EU leaders were negotiating in a tough manner. The talks need to be concluded before mid-November to avoid US action.

6 E.g., see Forbes, "25% car tariffs", 26 March 2019. 7 See, USTR, Agreement between the United States of America, the United Mexican States and Canada, Text, 30 November 2018. 8 See Inside US Trade, G7 roundup, 27 August 2019.

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Where are we with the USMCA (the new NAFTA)?

 US Congress returns to session in early September, but the timing of any votes on the USMCA remains uncertain

 Enabling legislation in Canada may expire since a general election must be held by 21 October

 Mexico is in waiting mode after the trade agreement was approved by the Senate with a broad majority

Ryan Wang Timing for ratification remains unclear US Economist HSBC Securities (USA) Inc. A vote on the USMCA has yet to be scheduled in the US Congress [email protected] +1 212 525 3181 Congress was in recess for most of the month of August. Both the Senate and the House of David Watt Representatives will return to session in the second week of September. However, the potential Chief Economist, Canada timing of a vote on the United States-Mexico-Canada agreement (USMCA) in either chamber HSBC Securities (Canada) Inc. [email protected] remains unclear. In particular, it will be important to see if and when a vote is scheduled in the +1 416 868 8130 House of Representatives and whether there would need to be bipartisan support to arrive at Alexis Milo the number of votes necessary for ratification. Chief Economist and Head of Research, Mexico HSBC Mexico, S.A., Institucion de Timing will be important as the US election cycle continues to pick up steam ahead of Banca Multiple, Grupo Financiero Presidential and Congressional elections in November 2020. The Chairman of the Senate HSBC [email protected] Finance Committee, Chuck Grassley, recently commented on the USMCA: "It needs to be done +52 55 5721 2172 this year and I don't think there's any doubt we'll get it done this year… [But] let's say it gets to Jose Carlos Sanchez November and it's not done, I get very nervous." Economist, Mexico HSBC Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero Canada’s approval of NAFTA’s replacement stalls ahead of election HSBC Canada started the process to ratify legislation to replace NAFTA by tabling the text of the [email protected] +52 55 5721 5623 agreement in Parliament on 21 December 2018. The legislation to implement the Canada-US-Mexico Agreement (CUSMA), was subsequently introduced on 29 May 2019 (see, Canada Trade: CUSMA approval: first steps, 5 June 2019).

Progress has been slow since then as Canadian officials have said that Canada’s approval of CUSMA would move forward in tandem with US efforts. As a result, CUSMA completed only two of seven steps of the legislative approval process before Parliament adjourned for the summer. Once an election is called, all parliamentary functions will cease, and the CUSMA enabling legislation will expire. The election is expected to be called between 1 and 15 September. To be approved, the legislation would have to be reintroduced after the election. We see a strong possibility that CUSMA will not be dealt with until 2020 (see, Canada election primer, 24 July 2019).

The removal, in mid-May, of tariffs on US imports of steel and aluminium from Canada and retaliatory tariffs on Canadian imports from the US helped ease some of the uncertainty

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surrounding the framework for North American trade. Nonetheless, the lack of progress on the ratification of NAFTA’s replacement looms as a potential headwind to Canadian exports and business investment, as it leaves open that possibility that North American trade tensions could flare up unexpectedly.

Mexico is in waiting mode After Mexico averted US tariffs on Mexican goods on 7 June, thanks to an agreement to reduce unlawful immigration into the US, attention has returned to the pending passage of NAFTA's replacement by the legislatures of the three countries. The approval of the trade agreement continues to be an important objective from the Mexican perspective. In particular, it would help to provide more certainty on the trade relationship between the US and Mexico amidst increasing global trade tensions and also to update and modernize the trade framework.

In light of these events, the Mexican Congress has increased its efforts to move forward with the ratification process. After Congress approved a labour reform package to meet standards discussed with the US and Canada in previous negotiations, the legislation to ratify the trade agreement was approved by the Mexican Senate, with a broad majority. After this ratification, Mexico has moved into waiting mode, as there is not much left to do on the Mexican side. The remaining stages of the ratification process largely depend on the legislative timeline and developments in the US and Canada. As long as the timing of ratification and implementation of the new trade agreement remains uncertain, Mexico will remain sensitive to any surprise developments. For now, however, Mexico can continue to operate under the NAFTA framework and therefore this remains supportive for Mexico's trade prospects with the US and Canada.

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Will the WTO survive?

 The WTO supports global trade as a forum for negotiation, a channel for improved policy transparency, and a means of dispute settlement

 Conflict among WTO members has emerged over issues such as dispute settlement, preferences for poor countries, and subsidies

 But, the system remains economically valuable, and it is in the interest of most WTO members to advance reform and sustain it

Doug Lippoldt As tensions mount, so do positive steps Chief Trade Economist HSBC Bank plc A mixed picture [email protected] +44 20 7992 0375 The WTO's performance over the past decade presents a mixed picture (HSBC, The push for WTO reform, 12 October 2018). The so-called Doha Development round of global, expansive, trade negotiations launched in November 2001 ground to a halt after more than 12 years of talks with little to show for the efforts. Discontent is mounting among some developing countries on the contribution of the system to their economic development. Grievances have built up for the US and some other advanced economies with the WTO's dispute settlement process (alleged to have imposed new obligations on members without their consent) and with trade- distorting behaviour on the part of some members (e.g., alleged to have taken advantage of gaps in the WTO accords to support non-market activity by national champion firms).

The US has become an especially vocal critic of the WTO. It has demanded reforms to prevent judicial overreach and ensure timely decisions under the Dispute Settlement Mechanism.9 In the meantime, the US is blocking appointment of new adjudicators to the WTO's Appellate Body. This could prevent its functioning after two critical appointments expire on 10 December 2019. The US has also proposed strict eligibility requirements for access to developing country trade preferences, which would exclude large and advanced developing countries.10 Not surprisingly, China and India oppose such proposals.11 The US President has indicated that he is prepared to withdraw if the WTO is unable to advance on reforms.12

Yet, the WTO has delivered positive and concrete results, successfully adjudicating many disputes, providing increased transparency in trade policy, and even concluding some important trade accords. In recent years, members have agreed to deals to expand duty-free treatment for USD1.3trn in electronics trade, cut red tape at the border (expected to boost global trade by USD1trn), and abolish trade-distorting export subsidies in agriculture. Such achievements have elicited support for the WTO and constructive proposals for further reforms from members such as China, the EU and Canada, among others. Canada and the EU have proposed a joint

9 PIIE, "The dispute settlement crisis in the World Trade Organization", Policy Brief, March 2018. 10 E.g., see White House, Memorandum on reforming developing-country status, Presidential Memorandum, 26 July 2019. 11 E.g., see Xinhuanet, "China supports necessary WTO reforms: MOFCOM", 23 November 2018. 12 E.g., see UPI, "Trump threatens to pull out of WTO, 14 August 2019.

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workaround to enable the WTO appeals function to operate based on an arbitration procedure staffed by former members of the Appellate Body.13 And other countries have submitted a variety of proposals to advance WTO reform and tackle new items on the negotiating agenda such as e-commerce, fisheries subsidies, and domestic services regulation.

What does the WTO actually do? The WTO is a member-led, inter-governmental institution playing a central role in the global economy. Founded in 1995, it rests upon a system of international agreements covering trade in goods and services, as well as trade-related aspects of issues such as intellectual property rights and investment. The legal framework is expansive, but it is not comprehensive. For example, some types of trade-distorting state support for firms (including state-owned enterprises) are not yet effectively disciplined.14 Members, now numbering 164, determine the agenda and take on many of the functions of the WTO (Map 1), supported by the c. 625 staff.15 The WTO was founded on five main principles: 1) promote trade without discrimination; 2) liberalise trade gradually, through negotiation; 3) improve predictability of the trading environment; 4) promote fair competition; 5) encourage development and economic reform.16 To give effect to these, the WTO maintains three main functions: 1) a forum for negotiation; 2) a monitor of trade developments and an exchange for information among members; and 3) an adjudicator of trade conflicts related to WTO accords.

Why this matters and why the WTO is likely to survive The healthy operation of the WTO in providing a framework for global trade matters for the global economy. Among global institutions, the WTO is best placed to deliver a consistent and transparent framework for trade. It is unique in its capacity for enforceable decisions, albeit with some limitations (e.g., no ability to levy damages). The system enables countries small and large to have recourse in cases of abuse and seek remedies. The WTO can liberalise trade and reduce discrimination at the global level, which is economically optimal. Given that it is in the economic self-interest of most countries around the world to sustain the system, it is likely to survive in some form, even if a member were to withdraw. Map 1. WTO members and observers, August 2019

Key Member Observer Non-participant

Source: WTO, Members and observers, August 2019; HSBC.

13 E.g., see EC, "Joint statement by the European Union and Canada", 25 July 2019. 14 Another example: Protection for trade secrets (undisclosed information) is required, but the relevant treaty does not mention specific standards or sanctions for non-compliance. WTO, Agreement on Trade Related Aspects of Intellectual Property Rights,. 15 WTO, Overview of the WTO Secretariat, viewed on 28 August 2019. 16 WTO, Principles of the trading system, 2019.

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Trade liberalisation advances

 Escalating US-China trade tensions come on the back of rising world trade protectionism since the Global Financial Crisis…

 …but Asia-Pacific and European economies are striking a number of comprehensive trade deals…

 …and WTO-led efforts to reduce tariffs, cut trade costs, and tackle barriers to e-commerce will help build resilience to trade shocks

Shanella Rajanayagam Protectionism versus liberalisation Trade Economist HSBC Bank plc Trade protectionism is on the rise [email protected] +44 20 3268 4118 Although much of the focus on trade over the past 18 months has centred on escalating US-China trade tensions, global trade protectionism has been on the rise since the Global Financial Crisis (2008 to 2009). In the 12 months from mid-May 2018 to mid-May 2019, G20 economies implemented 231 trade protectionist measures (covering USD860bn worth of trade) compared to 208 liberalising measures (on USD634bn worth of trade).17 Moreover, as global average tariff rates have come down from 15.0% in 1990 to 5.2% in 2017, economies have increasingly turned toward implementing non-tariff measures such as regulatory restrictions and red tape. Map 2 shows the number of non-traditional trade restrictions (which also tend to be less transparent) currently in force by economy. Heavy users of trade restrictive actions are the US, India, Russia, China, and Canada.

Map 2: Non-traditional trade restrictions in effect by country

Notes: Excludes import tariffs, import quotas, import tariff quotas, import bans, anti-circumvention, anti-dumping, anti-subsidy, import monitoring, safeguards, and special safeguards. Source: HSBC and Global Trade Alert (accessed 28 August 2019)

17 WTO November 2018 report on G20 trade measures and WTO June 2019 report on G20 trade measures. Trade protectionist refers to trade-restrictive measures and trade remedy initiations, while trade liberalising refers to measures facilitating trade and trade remedy terminations.

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In pursuit of trade liberalisation Notwithstanding the rise in protectionism, efforts to liberalise trade continue to advance around the world in various forms. Asia-Pacific and European economies have generally been most engaged in striking, or working towards concluding, comprehensive trade deals. Notable examples are:

 The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is now in effect for seven members (Australia, Canada, Japan, Mexico, New Zealand, Singapore, and Vietnam), while ratification is pending for the remaining four members (Brunei, Chile, Malaysia and Peru). The CPTPP is a high-standards trade deal that goes beyond tariff elimination to include other trade-related aspects such as environmental protection, labour standards, data protection (e.g. data privacy and free flow of data), and more. The deal is already delivering early wins for exporters and other countries such as Thailand and the UK (post-Brexit) have expressed interest in joining (see HSBC, New trade deals deliver, 16 May 2019).

 EU trade deals: The EU is expanding its market reach by striking free trade agreements (FTAs) with partners further afield. For instance, the EU-Japan Economic Partnership Agreement, which is the largest trade deal ever negotiated by the EU, took effect on 1 February 2019 and involves sweeping tariff liberalisation, as well as commitments to tackle non-tariff barriers (e.g. alignment of automotive standards) (see HSBC, New trade deals deliver, 16 May 2019). The EU-Canada Comprehensive Economic and Trade Agreement (CETA) has been in force provisionally since September 2017 when tariffs on 98% of EU and Canadian product lines were eliminated. Notably, the EU has also concluded deals with Singapore (signed in October 2018, ratification pending) and Vietnam (signed in June 2019, ratification pending), and reached an agreement in principle with Mercosur18 (LatAm’s Southern Common Market) in June 2019 (see HSBC, Boosting trade, 4 July 2019).

 Pan-Asian trade talks on the Regional Comprehensive Economic Partnership (RCEP) are also set to conclude this year. The deal comprises the 10 ASEAN nations and its six FTA partners (Australia, China, India, Japan, Korea and New Zealand), which collectively make up nearly half of the world’s population. Members hope to agree fairly ambitious liberalisation across goods, services and non-tariff barriers, although India remains hesitant to liberalise certain sensitive sectors (e.g. agriculture and steel). If successful this would mark a significant step forward for Asian integration (see HSBC, Asian Trade Prospects, August 2019).

Beyond FTAs, economies are also engaged in various WTO-related initiatives to dismantle trade barriers. For example: 76 WTO members (including the EU28, US and China) launched discussions earlier this year to tackle barriers to e-commerce (e.g. undue data localisation requirements); 54 WTO members are in the process of removing tariffs on USD1.3trn worth of electronics products under the expanded Informational Technology Agreement; and the WTO Trade Facilitation Agreement is already helping to cut red tape and could reduce trade costs by 10% to 18%.19

So, is free trade under threat? While it is easy to get caught up in US-China trade developments, it is important to bear in mind that trade liberalisation continues to advance, at scale and pace, in other parts of the world. But given the current shape of the global operating environment, it is critical that economies do not lose trade liberalisation momentum and turn inward. Further trade liberalisation could even help build resilience to such external shocks via access to more diversified products and markets. Plus new forms of trade are emerging (e.g. digital trade), making it easier to send goods and services across borders. So, we see reason to remain optimistic about global trade, even as protectionism looms.

18 Mercosur consists of Argentina, Brazil, Paraguay and Uruguay. Venezuela’s membership is currently suspended. 19 See WTO members’ joint statement on e-commerce; European Commission (EC), The Expansion of the Information Technology Agreement, 2016; and OECD, Implementation of the WTO Trade Facilitation Agreement, May 2018.

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Disclosure appendix

Analyst Certification The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Doug Lippoldt, Janet Henry, Ryan Wang, Qu Hongbin, Joseph Incalcaterra, James Lee, Elizabeth Martins, Chris Hare, Shanella Rajanayagam, Julia Wang, Erin Xin, Noelan Arbis, Yun Liu, Ki- Hyuk Lee, David Watt, Alexis Milo and Jose Carlos Sanchez

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Additional disclosures 1 This report is dated as at 02 September 2019. 2 All market data included in this report are dated as at close 29 August 2019, unless a different date and/or a specific time of day is indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument.

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Disclaimer

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Global Economics Research Team

CEEMEA Global North America Global Chief Economist US Chief Economist, CEEMEA Janet Henry +44 20 7991 6711 Simon Williams +44 20 7718 9563 [email protected] Ryan Wang +1 212 525 3181 [email protected] [email protected] Global Economist Economist, Russia and CIS James Pomeroy +44 20 7991 6714 Canada Artem Biryukov +7 495 721 1515 [email protected] [email protected] David G Watt +1 416 868 8130 Chief Trade Economist [email protected] Economist, CEE Douglas Lippoldt +44 20 7992 0375 Agata Urbanska-Giner +44 20 7992 2774 [email protected] Asia Pacific [email protected] Managing Director, Co-head Asian Trade Economist Chief Economist, Turkey Economics Research and Chief Economist Shanella Rajanayagam +44 20 3268 4118 Melis Metiner +44 20 3359 2636 Greater China [email protected] [email protected] Qu Hongbin +852 2822 2025 [email protected] Europe Economist, South Africa David Faulkner +27 11 676 4569 Managing Director, Co-head Asian Chief European Economist [email protected] Simon Wells +44 20 7991 6718 Economics Research Frederic Neumann +852 2822 4556 [email protected] Economist, Middle East and North Africa [email protected] Razan Nasser +971 4 423 6925 European Economist [email protected] Fabio Balboni +44 20 7992 0374 Managing Director, Chief Economist, Australia, New Zealand and Global [email protected] Economist, South Africa Commodities Thato Mosadi +27 11 676 4476 Paul Bloxham +612 9255 2635 Economist [email protected] Chris Hare +44 20 7991 2995 [email protected] [email protected] Chief Economist, India Argentina Pranjul Bhandari +91 22 2268 1841 United Kingdom Senior Economist [email protected] Jorge Morgenstern +54 11 4130 9229 Economist [email protected] Elizabeth Martins +44 20 7991 2170 Joseph Incalcaterra +852 2822 4687 [email protected] [email protected] Mexico Jingyang Chen +852 2996 6558 Germany Chief Economist, Mexico [email protected] Alexis Milo +52 55 5721 2172 Stefan Schilbe +49 211910 3137 [email protected] [email protected] Julia Wang +852 3604 3663 [email protected] Jose Carlos Sanchez +52 55 5721 5623 Rainer Sartoris +49 211910 2470 [email protected] [email protected] Daniel John Smith +612 9006 5729 [email protected] France James Lee +852 2822 1647 Olivier Vigna +33 1 4070 3266 [email protected] [email protected] Noelan Arbis +852 2822 4325 Chantana Sam +33 1 4070 7795 [email protected] [email protected] Yun Liu + 852 2822 4297 [email protected]

Aayushi Chaudhary +91 22 2268 5543 [email protected]

Erin Xin +852 2996 6975 [email protected]

Ki-Hyuk Lee + 852 2822 4523 [email protected]

Shanshan Song +86 10 5999 8234 [email protected]