I grew up in
the New York City area in the 1980s. My dad always read the tabloids, and so I
started to do so as well. That’s where I first learned about a fascinating
phenomenon — the Guardian Angels. This was a large group of concerned citizens
who wore distinctive uniforms, most notably red berets, and patrolled subways
and other public areas in an attempt to prevent crimes from occurring during
what was perceived to be a lawless time for New York City. In the beginning,
the Guardian Angels were labeled by the tabloids as “vigilantes” who were “taking
the law into their own hands.” Today, they are a reminder of how chaotic New
York City was at that time.
thinking about the Guardian Angels lately as I track the ongoing headlines
about global trade — an area that I believe is descending into chaos and may be
soon be subject to countries taking the law into their own hands through a
process that I call “vigilante protectionism.” Why do I believe this? Because
this week will likely go down in history as when the World Trade Organization
(WTO) ceased to function effectively.
The WTO hits a crisis point
By way of
background, when the WTO was created more than 20 years ago, the US was given
veto power over appointments to its seven-member appeals panel. The US has
wielded that power as a weapon in the last several years, blocking the
appointment of any new judges. And now we have reached a crisis point: There
are only three judges left on the appeals panel — the minimum number allowed to
make binding decisions — and two of those judges’ terms are scheduled to expire
this Tuesday. Now, I should say that the WTO has many flaws, and I think the US
is right to push for reforms. However, blocking the appointment of judges is
not exactly the approach I would recommend. Doing so ensures that the WTO will
not be able to render any more binding decisions, rendering it impotent.
And so what would
happen? Grievances could still be heard by the WTO, but they would not be
enforceable because countries have a right of appeal — if they are unhappy with
a ruling, they could simply delay enforcement indefinitely by filing an appeal.
I expect we will be entering an era of what I call vigilante protectionism,
where countries forego traditional institutions like the WTO and act on their
own to further their trade interests. Large economies are more likely to
utilize their size to their advantage, which could negatively impact some
smaller and emerging economies. I believe this hobbling of the WTO would only
exacerbate the trade frictions we have seen over the last several years — and would
of course further the trend toward de-globalization.
The trade war continues to expand
This could add
to the impact that investors have already been experiencing due to significant
trade disruption. Think of the roller coaster ride markets went on just last
week. Early in the week, the stock market fell on US President
Donald Trump’s statement that he might choose to delay a trade deal with China
until after the 2020 presidential election. The week ended more positively,
with China saying it would entertain applications for waivers on import tariffs
for soybean and pork shipments. However,
there is still the real possibility that Trump could apply more tariffs by his
self-imposed deadline of Dec. 15. And there remains a good
likelihood that the US and China will be unable to achieve even a Phase 1 trade
deal in 2019. (Even if they do agree to a Phase 1 deal, that would only scratch
the surface of the trade disagreements between the two countries.)
Also last week, Trump announced tariffs on
Brazilian and Argentinian steel manufacturers. This would be on top of the
Trump administration’s proposed tariffs on up to $2.4 billion worth of French
imports, including wine, in response to France’s tax on American tech companies.
Can central banks help?
As the trade war continues to expand, I believe that
vigilante protectionism will grow as well. The longer this continues, the more
damage it could do to free trade and global growth — but it would be a slow
bleed. The good news is that central banks appear willing to offer monetary
accommodation if and when the trade situation deteriorates significantly. While
this may not be very effective in supporting the economy, it could be very
effective in supporting risk assets.
It is important to note that the WTO’s crippling
should not have significant
effects for markets overnight. It could create more volatility for stock and
Treasury markets if and when countries begin to pursue trade disputes outside
of the WTO. But it could also lead to a positive effect if central banks choose
to provide more accommodation in response to concerns over a deteriorating free
I’ll be watching as the Federal Reserve (Fed) meets
this week. It seems clear to me that members of the Federal Open Market Committee
will sit on their hands at this meeting and maintain the status quo. However,
what will be important is the “dot plot” they will issue, giving us a sense of
what their expected monetary policy prescription is for 2020 at this juncture.
Even more important will be Fed Chair Jay Powell’s press conference where he
may receive some questions on the trade situation and perhaps provides some
insight into how the Fed might respond if the situation deteriorates.
I will also be following this week’s European
Central Bank (ECB) meeting closely. This will be Christine Lagarde’s first
meeting as ECB president, and it will be important to hear what she has to say
about current monetary policy tools and their adverse effects. I will certainly
be interested in any insights she might provide on the upcoming strategic
review. Finally, she may also provide some hints as to how the ECB might
respond if the trade situation deteriorates.
image: Sasin Tipchai /
Federal Reserve’s “dot plot” is a chart that the central bank uses to
illustrate its outlook for the path of interest rates.
Federal Open Market Committee (FOMC) is a 12-member committee of the Federal
Reserve Board that meets regularly to set monetary policy, including the
interest rates that are charged to banks.
opinions referenced above are those of the author as of Dec. 9, 2019. These comments should not be construed as
recommendations, but as an illustration of broader themes. Forward-looking
statements are not guarantees of future results. They involve risks,
uncertainties and assumptions; there can be no assurance that actual results
will not differ materially from expectations.