Could the global trade war hit Romania? Economists say the main risks are inflation, lower foreign investment and rising unemployment

A trade war between the main global economies triggered by rising import tariffs could hit Romania, a member of the European Union, through several channels, mainly by imported inflation, lower foreign investment and higher unemployment rates, economists suggest.

On June 1, US President Donald Trump ended exemptions for the EU, Canada and Mexico from tariffs of 25 percent for steel and 10 percent for aluminium.

The European Commission launched a legal challenge against the US tariffs at the World Trade Organization and hit back with duties of 25 percent on bourbon, jeans, motorcycles, orange juice and a variety of steel products made in US, ratcheting up a transatlantic trade conflict.

Mexico retaliated to US tariffs on steel and aluminium by introducing tariffs on American products ranging from steel to pork and bourbon.

Canada has also announced retaliatory tariffs on USD 12.9 billion worth of US exports from July 1.

But this could be only the first phase of a larger trade war between the global economies. An internal memo circulated among EU governments and obtained by Bloomberg shows that the global trade war is about to get worse and the rules-based system of international commerce is expected to revert to an environment where the strong impose their will upon the weak.

Romania, a member of one of the largest global economies – the European Union, could feel the impact of this trade war through several channels.

Major risks

The main obvious channel is the trade balance, even if the United States is not a large trading partner for Romania.

In 2017, Romania exported goods of EUR 1.1 billion to the US market – or 1.8 percent of total exports, the US being only the 14^th main foreign market for Romania – and has imported from the US goods of EUR 1.09 billion – 1.4 percent of total imports, according to official data consulted by Business Review.

But Romania risks to be hit harder through other channels.

“Although in 2017 the intensity of international trade has increased, protectionist measures could undermine the recent favorable course of global economic activity. The impact of these decisions could be manifested through two main channels, affecting both consumption and investment,” the National Bank of Romania (BNR) said in its recently released 2017 annual report.

The central bank’s experts say that higher import prices could put pressure on production prices and reduce the purchasing power of households, especially if imported goods can’t be substituted by domestically produced goods.

“This dynamic would be reflected in consumption and investment, while reducing employment,” the report points out.

A possibly escalating trade dispute would affect both consumer sentiment, causing households to postpone or reduce their spending, and the investment environment, which should reconsider their business plans, economists estimate.

In an uncertain economic context, investors could narrow their stock portfolios and the amount of funding they offer, while demanding increased returns to offset the rise in risk

“If those trade restrictions will also affect the FDI flows – which will be less attracted by economies offering the advantage of lower production costs if there are no guarantees that they can export to developed countries – protectionist trends make it difficult to finance current account deficits in emerging economies,” the report says.

Romania is particularly vulnerable to a global trade war given that a significant part of domestic absorption is covered by imports – and their advance outpaced that of exports since 2014, so that economic growth was accompanied by a widening of the current account deficit to 3.4 percent of GDP in 2017.

“Although this level remained below the indicative threshold of the scoreboard and was fully financed by stable capital flows, the path of this macroeconomic variable in the past few years is a source of concern, as most of the EU Member States recorded over the same period either current account surpluses or decreasing deficits,” BNR’s experts warn.

Romania also lack fiscal space to boost economic activity if the trade war triggers an economic slowdown.

The general government deficit stood at 2.9 percent of GDP in 2017, nearing again the ceiling of 3 percent set under the Stability and Growth Pact, amid the further expansionary fiscal policy stance.

Crumbling economic model

The memo by the European Commission says that the disputes between the US and its closest trading partners are set to escalate in the coming months, “as more unilateral measures are threatened and imposed, leading, in some cases, to countermeasures or to mercantilist deals.”

The warnings come as the export-based European economic model risks crumbling under pressure from US President Donald Trump, who imposed tariffs on steel and aluminium imports from Europe and is now threatening a 20 percent tariff on European cars, a measure that would deal a massive blow to the EU’s auto industry.

The memo outlines three main drivers of the upcoming trade crisis:

– Gaps in the rulebook of global trade “leading to distortions, many of which associated with non-market policies and practices in major trading nations, that the WTO does not seem able to address adequately”;

– Aggressive unilateral actions by the U.S. targeting allies and foes alike with punitive tariffs;

– The U.S.’s decision to block appointments of members to the World Trade Organization’s Appellate Body that serves as the final arbiter in trade disputes.

The EU is developing proposals to revamp WTO rules, as it seeks to save it from what it sees as an all but certain demise.

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