Article
Written by Molly Rumbelow
Posted on 23/07/2018

Are the G20’s 'downside risks' to the economy coming home to roost?

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Since the G20 finance ministers’ meetings in March and April, it’s fair to say that a lot has changed in terms of global environment, both from an economical and geopolitical perspective.
In the April meeting, two of the key risks that were brought to the table were the impact that difficult trading conditions and geopolitical tensions could have on impeding or freezing global growth.
In this article, we look into what has happened in the first half of this year, and what the repercussions could be on a global scale.

 

Surprise tariffs could tempt a trade war

Since the last meeting in April, President Trump has announced fairly severe tariffs on steel and aluminium. The reasons for doing this have been cited as restraining imports, preventing transhipment and protecting national security.

Whether the tariffs will succeed in furthering these agendas is yet to be seen. However, the global fallout from what seems to be a shock announcement is already becoming apparent.

Given that a large reason for the renewed global growth is down to the benefits of high energy and metal prices for many commodity-exporting countries, what will trade barriers like this do to what has recently been a rosier looking outlook for global growth going forward?

Even before the metal trade barriers were announced, the North American Free Trade Agreement (NAFTA) was in jeopardy and has been under the microscope for a long time now in terms of renegotiation. Whilst we won’t go into minute detail about where it currently stands in this article, it’s fair to say it’s a sure sign that trade disputes have been simmering for a long time.

 

Retaliations could cause serious problems for growth

Now that the US trade tariff has been placed on the table, a number of nations have retaliated with their own levies. This includes the European Union, China, Russia, Turkey and India.

Whilst these levies may be a knee-jerk reaction, what they show is that countries aren’t willing to feel like they are being placed in a defensive position and are responding in-kind to the threat of trade ‘blackmail’. It is that tit-for-tat show that is causing alarm in terms of the global financial economy.

In the short term, these sorts of tariffs could potentially slow both trade and investment, and potentially lead to the domino effect of affecting medium-term growth.

 

What can be done to de-escalate trade tensions? 

Policymakers need to continue to drive home the importance of complete support for the multilateral trading system. Whilst the nations mentioned previously may have the equity to be able to withstand escalating trade tensions and the impacts they will bring, undeveloped countries certainly won’t. 

The interconnectivity of trade, investment and productivity means that one cannot be shielded if there is volatility in the other, so all three need to be monitored carefully. 

 

Other geopolitical tensions are a risk too

As well as tensions brought from trade-talks, there are other geopolitical issues which also have economic impacts. 

Historically strong relationships that seem to be eroding between some of our largest nations have caused jitters within the marketplace. Whilst there’s never been a safe bet when it comes to money markets – there were supposed assumptions that could be made about the strength of certain geopolitical relationships. However, given that international relationships now play out in a number of different ways, these assumptions are being challenged at the cost of stable markets. 

An example of this is the rise of what we call ‘cyber-power’ – the countries who may have more sophisticated cyber weapons or defences that now have more clout in terms of the worldwide conversation. This has given way to a rise in geopolitical tensions. Tensions that the global equity markets would react to sharply if they were to boil over.

Many equity funds have taken a more cautious stance in light of these risks and are changing their portfolios to address some of the volatility.

 

What can the G20 do to prevent these tensions from boiling over? 

Given these increasingly bitter trade talks and an increasingly difficult geopolitical landscape, what does the G20 need to do to prevent the stalling or collapse of current global growth?

Before the next meeting in July, the G20 has promised to look into putting concrete proposals in place to make sure the global economy stays on this positive path. These will be key to providing a solid framework to start reaffirming the global need for multilateralism in terms of trade.

And in the case of geopolitical tensions? The WTO needs to continue to communicate the importance of not going backwards in terms of international relationships. Nations can’t afford to retreat inwards if growth is to continue.