Bold is too soft a word for today’s trade wars. So much is already on the table in this high-stakes game, and the amounts keep rising. The perpetrators of the acrimony can leave the impression that they are playing a very dangerous, one-sided game in which the opponents, with much less to lose, can wait it out on the other side of the table. True or false?
It’s hard to tell without looking at the table stakes. Let’s consider the big one first—the U.S.-China spat. America talks like there’s not much to lose, but the tab is actually about as steep as it gets. Wagering has been going on with the backdrop of a solid economy, persistent job creation, impossibly low unemployment rates, and a consumer that is happy despite the political uncertainty. But tariffs against China are beginning to bite. Trade flows are declining, and businesses are holding back on investments. What’s at stake is a reversal of the hiring binge and a full-blown recession just ahead of the presidential election.
Can China just wait it out? Some think so, but recent indicators seem to disagree. Growth in industrial production has been sliding to unusual lows, and GDP growth has recently been setting new modern-day lows. The latest data on economic policy uncertainty show a spike in China that far exceeds those seen in the Great Recession, the post-stimulus scare and in the last U.S. election. In fact, the surge in Chinese uncertainty has no peer in any other nation surveyed. Trade and investment are still the key drivers of China’s economy, and neither one is doing particularly well. The latest numbers show exports to the U.S. down 10%. China is no bystander in its trade battle with the U.S.
Is it any different in the European battle? While more than a trade war, this brouhaha also has huge economic implications. On the U.K. side, capital flight has already begun. Manufacturers—most notably in the auto sector—who had located in the U.K. principally to access the European market have decided to vastly reduce or eliminate their U.K. footprint, preferring a Continental location to the Island of Uncertainty. Financial powerhouses in London are hedging their bets, opening shell offices on the Continent just in case. Frankfurt, Paris and Dublin are all opportunistically angling to be the next financial hub. Add it up, and the Bank of England has said it could cost the U.K. 5% of GDP, with an upper estimate of 8%. The lower estimate exceeds the average Great Recession impact on developed markets.
Does the Continent get off scot-free? Not at all. Its economy is not in the greatest shape, with Germany close to recession, Italy in turmoil and Spain still trying to recover from its decade-long economic drubbing. The knock-on effect from additional U.K. Brexit-gone-bad weakness would clearly be significant. Populism is also an issue in country after country on the Continent, and a loss on the Brexit front could further stir political dissent across Europe. All this suggests that Brussels also needs a deal.
Add it all up, and the cost to the entire world is pretty significant. The slowdown of growth, which is otherwise unnecessary, could easily tip the world into recession in the coming 12 months at a time when there is nowhere near the policy firepower that existed in 2008. Slowdown and recession would further feed an already-widespread notion that post-war institutions are in disarray, driving a greater tendency for countries to “go it alone.” At the same time, a plethora of nations are embroiled in significant disruptive and costly protest movements.
In all the mayhem, time is a key factor. Inertia alone will lead to recession; if there are remedies to the current malaise, they need to be administered soon to have their needed effect.
The bottom line?
It’s clear that in the current key trade disputes, there are no winners—we all have lots to lose. But it goes further than just a weak GDP story; economic fundamentals suggest we are throwing away what would otherwise be robust growth, possibly the best we would have experienced since the Great Recession. The handful of world leaders currently around the game table themselves have a lot to lose if they get it wrong. Let’s hope we all want to win badly enough.
