The ViewHow Donald Trump and his trade wars could turn the global asset bubble into a weapon of mass destruction
Anthony Rowley says the surge in the value of global trade is underpinned by buoyant financial markets. However, all this could be wiped out by a crisis of confidence triggered by the US president’s trade disputes
This would be true only if a couple of relatively small economies that are not of “systemic” importance were to slap tariffs on imports from each other. When the world’s biggest economies engage in such actions, that is something else – for reasons that are not immediately obvious when viewed only in terms of trade statistics.
Trade obviously is a critical factor in creating and sustaining global economic activity. But it is money that makes the world go around and money critically impacts trade, not only by virtue of its role as a medium of exchange but also because of the “wealth effect” that financial markets exert on supply and demand.
A few figures illustrate this point. World trade in goods is worth around US$16 trillion a year, plus another US$4 trillion in services trade – making some US$20 trillion in all. This is sizeable when stacked up against world gross domestic product of US$80 trillion. But the total value of global financial assets towers massively over both figures at near US$300 trillion.
“Paper” wealth of the kind represented by stocks, bonds and other financial securities obviously affects purchasing power. When the prices of these securities rise, that creates a “wealth effect” which in turn boosts purchasing power, and thus also the volume and value of trade. The reverse applies when securities prices fall. Trade then declines.