Trump is wrong. Trade wars are not easy to win, even non-players end up as losers

Tan KW

Publish date: Tue, 20 Aug 2019, 09:48 PM

Stock market “relief rallies” – such as the temporary one that greeted US President Donald Trump’s decision to hold off

for the moment on imposing a further round of tariff increases on China – have become as frequent as they are fatuous. They are surely signs that markets are flying blind towards a crash landing.

If this sounds overly pessimistic, try counting the grounds for optimism that the global economy can exit safely from Trump’s trade and currency wars. Then compare the result with the reasons for fearing a stall, as speed and altitude meters continue to register declines, and see which scores highest.

It is not just indicators like the growth of the world’s biggest economies (the US, China, Japan and Germany) that are falling. A range of other instruments, registering everything from the rising value of dollar debt to outflows of funds from emerging markets, are signalling altitude loss.

Analyses from the International Monetary Fund, the Organisation for Economic Cooperation and Development and other sources have become increasingly cautious in recent months, as trade and currency wars exact a rising toll on confidence. But there are limits to the frankness that official bodies such as these can show without being accused of precipitating a crisis.

Yet, it does not require a gargantuan intellect to compute the risks in the global economy and to see that it is already in stall mode. The onus now is on those who believe recession can be avoided to justify their optimism, rather than on “pessimists” to prove their case.

What is truly scary is the apparent belief in financial markets that the Trump trade wars can be ended at the throw of a switch – that, if the US leader calls off his tariff attacks, the global economy will quickly revert to the status quo ante, or that if he even pauses, danger can be averted.

Hence, the absurd relief rallies every time Trump claims that China is suing for peace (when in fact it appears to be Trump himself who is beginning to fear there will be “no Christmas” this year). The truth is that we have passed the point of no return in this downward leg of the economic cycle.

Supposing the US president were to declare a truce, or even go so far as to remove all tariffs levied on China and others, who could have confidence that he (or his successor) might not erect them again at short notice? Trade confidence has taken a nasty knock, if not exactly a fatal blow.

This eliminates trade as a pillar of economic recovery, whereas it had been the mainstay of global growth from late 2016 until the Trump tariffs kicked in. It will take time for confidence to creep back and for supply chains to be reconstructed so that sourcing vulnerabilities can be eliminated.

What about investment – that other primary engine of economic momentum (along with consumption)? Private capital investment has likewise become a victim of damaged confidence everywhere including the United States, while recent weak economic data

from China and Germany is ominous in this regard.

So, what are we left with to hold the line against recession? Private consumption, maybe, but only in the US does it look at all robust and that mainly on the back of consumer borrowing. In any case, the warnings of trouble in the global economy do not augur well for consumer confidence.

So, where do we look for salvation? Do not expect emerging markets to bail out advanced economies this time. As the Institute of International Finance pointed out recently, the strong dollar is sucking money out of emerging economies and also hiking the cost of their corporates’ dollar borrowing.

We are left with public investment as the only real catalyst for a resumption in economic momentum and that, of course, takes us directly into the area of fiscal stimulus and indirectly into the question of whether monetary stimulus still has a role to play after a long innings already.

Fiscal stimulus is unlikely to kick in, in a big way, until all else is seen to have failed (and until financial markets stop sending silly signals that all can still be well, given a bit more monetary easing). Few politicians wish to be seen to be going first when spending public money.

When the fiscal bailout does come, as it must once a crash seems unavoidable (or maybe even after it happens), the issue of monetary easing will become moot. A rescue can be financed only by central banks undertaking even bigger purchases of government debt than they have done already.

The history of trade wars may not repeat itself but the echoes of the past are remarkably strong just now. Trade wars, contrary to what Trump naively believes, are not “easy to win”. They are games for “losers”, with lots of collateral damage even for those who play no active part in them.

- SCMP

Discussions

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nash2233

do not believe in the American politicians especially the guy who names himself donald trump.the american economy is now at or close to full employment .

2019-08-21 17:27

enning22

don't be silly , just look at China current condition ,not her propaganda ,you can deduced the dismal state.currency RMB devaluation is also another strong indicator.

2019-08-21 17:29

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