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Trade collapse due to protectionism is “top risk” to global economy

Global / 28-02-18 / by

A collapse in global trade due to US protectionism is the top risk to the global economy, alongside a prolonged fall in major stock markets.

Research from the Economist Intelligence Unit (EIU) shows that there is a “moderate probability” of a global trade slump, while it would carry a “very high impact”.

While analysts are currently forecasting strong global trade growth this year and next, buoyed by strong emerging market export growth and robust Chinese economic growth, the threat of the Trump regime looms large.

“There’s a risk that the administration of the US President, Donald Trump, translates its protectionist rhetoric into more concrete action that severely damages global trade channels,” the report’s authors wrote.

The two central scenarios are a US withdrawal from the North American Free Trade Agreement (Nafta) and measures taken by the US against China that instigate a trade war.

While Nafta renegotiations are well underway, the risk of Trump withdrawing the US from the agreement with Canada and Mexico remains real. The president has a binary view on trade: you either win or lose, and his outlook has been criticised for failing to account for the many nuances that trade deficits are laden with.

Such a scenario would “create enormous ructions in one of the largest free trade areas in the world”, the report says. Not only would it fuel protectionism elsewhere, it would also make it more difficult for liberal economies like the EU and Japan to espouse their agenda on a wider basis.

The second scenario, that of the US instigating a trade war with China, feels very real indeed. The US has already introduced tariffs on Chinese solar panels and washing machines, while Trump has been publicly floating plans to introduce tariffs on aluminium and steel.

As reported by GTR last week, this could set off a whole series of unintended consequences, damaging the export supply chains around Asia, but also drawing in banking, finance and fintech, depending on the escalation of the tit-for-tat.

“Prices and availability for US and Chinese products in the supply chains of companies from other nations would be badly affected. Consequently, global growth would be notably curtailed as investment and consumer spending fall back,” the EIU warns.

Other big risks to the economy in 2018 include territorial disputes in the South China Sea, major cyber-attacks, a “disorderly and prolonged economic downturn” in China, a major military confrontation on the Korean Peninsula, an escalation of proxy conflicts in the Middle East, a significant drop in oil prices, and the withdrawal of multiple economies from the eurozone.

“Despite the encouraging headline growth figures, the global economy is facing the highest level of risk in years. Indeed, this favourable economic picture appears to come from a completely different world to the one where headlines are dominated by protectionist rhetoric, major territorial disputes, terrorism, surging cyber-crime and even the threat of nuclear war,” the authors wrote.

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