US-China trade war is pushing the world economy closer to the edge. The longer it goes on, the harder it will be to undo the damage
- Compared to pre-2008 crisis levels, world economic growth has plummeted by half and is at risk of a long-term, hard-to-reverse stagnation. Returning to global integration and multilateral reconciliation could dramatically change the scenario
In the first scenario, a return to cooperation, the US and China achieve a trade agreement. Both agree to phase out additional tariffs, renounce trade threats and establish working groups to defuse other friction areas in intellectual property rights, social and political issues, and military matters.
Global growth prospects could — in the best scenario — exceed the old baselines of the Organisation for Economic Cooperation and Development or the International Monetary Fund, at more than 4 per cent.
Uncertainty decreases but fluctuates. Global economic prospects barely improve. Markets witness rallies and plunges. Global recovery fails. Global growth prospects remain close to 3.5-3.9 per cent. Only half a year ago, this scenario was still seen as viable. Today, it feels like a bygone world.
In the third, America First, scenario, the import value at stake is tenfold relative to the start of the trade war, amounting to more than US$500 billion, with soaring collateral damage. In China, it could shave 0.4 per cent off economic growth this year and, in the US, 0.8 per cent. Neither the US nor China agree to phase out additional tariffs. Talks linger, fail or lead to new friction.
Uncertainty increases, volatility returns. Global prospects decline further. Markets linger at the depths. In this scenario, global prospects dampen as world economic growth in 2019 sinks to 3 per cent or worse.
So, where are we today with regard to these scenarios? A simple answer is: moving closer to the edge. After trade frictions and the Trump tariffs undermined the momentum of global recovery, the International Monetary Fund finally woke up to the effects and started predicting that global economic activity will slow notably.
In brief, the status quo is shifting from the America First scenario towards an all-out global trade war.
To understand how much expectations have been revised, recall that before the 2008 crisis, the global growth rate was 4-4.3 per cent. The current rate has almost halved from its pre-crisis level. Something similar occurred in the 1970s, which saw the end of the “glorious 30” — three decades of solid post-war growth in major advanced economies.
The longer it takes to achieve multilateral reconciliation, the more likely it is that falling long-term growth rates will prove harder to reverse.
Dr Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Centre (Singapore). See http://www.differencegroup.net/