Home Markets Effects of China-US Trade War Affecting the Global Economy

Effects of China-US Trade War Affecting the Global Economy

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The effects of the US-China trade wars are reaching other bigwig economies around the world.

At the International Monetary Fund and World Bank fall gatherings held in Washington last week, finance ministers and bank governors discussed the dark states of economies all around the world. It was also noted how far the U.S. policy had changed since the International Monetary Fund (IMF) was co-founded by Washington in the 1940s.

President of the World Bank, David Malpass, shared with attendees: In the 1940s, the world economy had been suffering from high tariffs, economic depression, and war. After almost a decade of economic plight, Henry Morgenthau, who was U.S. Treasury Secretary then, spearheaded a system for the global economy, which we now know as IMF.

Malpass said that the message of the United States then was: “First, there’s no limit to prosperity. Second, broadly shared prosperity benefits, everyone.”

The IMF’s meeting was attended by 189 international representatives. Before the gathering ended, the negative effects of the U.S. trade tension were made clear. 

“Everybody loses,” Kristalina Georgieva, Managing Director of IMF, commented.

Fifteen months ago, a tariff war began between the U.S. and China, the biggest importer and exporter of the world, respectively. Amidst this ongoing trade war, President Donald Trump is renegotiating with many trading partners of Washington.

The expected global economic slowdown this 2019 is 3.0%, according to IMF’s estimates. This value represents the slowest pace of global growth in the past decade.

However, the U.S. is still the nation that is least exposed to the drop in exports. Unlike the other countries in the world’s top 20 economies, the U.S. has a huge consumer spending base domestically.

The effect of tariff wars on Europe’s economy

European countries that rely on exports and are open to trade,” are feeling the significant damages of the trade wars, said Pierre Moscovici, EU’s Economic and Financial Commissioner.

In 2018, about half of Germany’s Gross Domestic Product stemmed from national exports, the highest amount in any top global economy. German Finance Minister Olaf Scholz said that the business sector is experiencing widespread uncertainty.

Germany trade group BGA docked the country’s growth forecast in 2019 from 1.5% to 0.5% for German exports. Consequently, a lot of companies are reducing their plans for investments, which will affect the economy in future years.

In addition to the U.S.-China trade wars, the Brexit issue is also hampering worldwide economic growth, Scholz said. “The most important problem remains those factors that we cannot measure – specifically the reluctance to invest.”

But even in countries where economies don’t rely heavily on exports, the negative effects of the trade war are also being felt. Iceland, for one, is threatened by another economic collapse. 

Iceland sought help from the IMF in 2008 following a banking collapse. It was the first developed nation to do so.

“We have become dependent on tourism,” said Ásgeir Jónsson, governor of Iceland’s central bank.

Iceland’s annual visitors reached 2.5 million after their economic crisis about a decade prior. But since the trade conflict began, the number of foreign visitors has dropped. In fact, the number is down by 15.6% this summer compared to last year.

Iceland’s reserves of foreign currency are sourced from the boom of tourism. However, those are plummeting, too, said Jónsson.

Trade relationships have promoted peace and harmony among countries in recent years. But “you can never take global trade for granted,” according to Jónsson.

No immunity for the U.S.

The Japanese Cabinet office decreased its evaluation of October’s factory output. The weaker exports to the U.S. is the main contributor to the slowdown of Japanese production.

“The pick-up in global growth is being delayed,” said Haruhiko Kuroda, the Bank of Japan Governor. “Japan’s economy is seeing exports weaken significantly and that’s affecting factory output.”

Despite being the country least affected by the trade tension, the United States economy is still not immune. U.S. farmers, in particular, have been hurt by China’s tariffs on agricultural products from the States. As a consequence, Trump’s administration gave billions as financial aid.

The stalling of the United States-Mexico-Canada Agreement and the imposition of tariffs on steel and aluminum have also slowed down U.S. economic growth. West Sacramento Mayor Christopher Cabaldon said that offers for a $100 million project in the locale are 80% greater than expected due to the larger costs and potential new tariffs for months to come.

“Even in small cities like my own, we see the impacts of trade. We have come to realize the deep integration of our local economies in the global system,” Cabaldon said. “Most of my economic development plans … are playing out on a global stage, not down the freeway.”

Emerging economies pull out

The trade wars have pushed more African countries to become more economically self-reliant within their continent.

Kenya’s acting cabinet secretary for treasury, Ukur Yatani Kancho, said, “We must take it upon ourselves to grow trade among ourselves.”

According to Abdoulaye Daouda Diallo, Senegal’s finance minister, the U.S vs. China’s trade war will affect African countries’ energy sector. Moreover, the trade tensions highlighted the value of the African Continental Free Trade Agreement. 

Other rising markets are feeling the trade tensions, too. “Ukrainian exporters faced worsened conditions in global commodity markets,” that caused steel prices to drop, said Kateryna Rozhkova, the deputy governor of Ukraine’s central bank.

“The intensification of geopolitical conflicts led to rising oil and natural gas prices in the world,” she added.

The Gulf region is also being affected. According to Bahrain’s Finance Minister Sheikh Salman bin Khalifa Al Khalifa, the trade war is hampering investments. “Trade tensions create uncertainty and nobody is insulated from uncertainty.”

Meanwhile, Peru’s growth estimate was cut down from 4.2% to just 3% last August. On the other hand, Mexico is teetering on an economic recession, which officials predict will be more challenging to reverse.

“The Great Recession basically caught everybody by surprise, but economies were willing to cooperate and work together to pull it out,” Arturo Herrera, Mexico’s Finance Minister, weighed in. “This slowdown is taking nobody by surprise, but there is very little appetite for cooperation.”