The trade wars launched by the US against China and the European Union are breaking down the old structure of globalisation, which will give way to a new global trading system, centred on Asian powers, leading figures have argued.
Raghuram Rajan, former governor of the Reserve Bank of India, told GlobalMarkets that trade relations between countries were crumbling, because of the US’s feeling that it had been cheated on trade for a very long time.
“The old structure we have for globalisation is breaking down,” said Rajan, now a professor at the University of Chicago Booth School of Business. “But one must recognise that there are enormous benefits from trade, and that as we shut down the system, we lose all of that.”
Rajan said the global economy would have to break down first before it could be put back together, at which time the foundations for a different trading system would be laid.
“There will be more places for three or four big players, rather than the US being at the centre and being the crust that manages everything,” Rajan said. “The crust is broken, and other players will want more power as well as responsibility.”
The new world trading order would definitely include China, the US and EU as major blocs, with Japan potentially having the fourth spot, he predicted. Eventually they could be joined by India and other emerging markets. “It won’t be a G7, but a new G4 or G5,” added Rajan.
But he warned that they would not be able to run the system, and would instead tweak it to find their places.
Trade tensions have been on the minds of delegates at the IMF and World Bank annual meetings this week, as global growth sputters. The IMF slashed its global growth forecast for 2019 to just 3%, down from 3.8% in 2017. Its gloom was provoked by tit-for-tat trade spats, policy uncertainty and geopolitical risks, against a backdrop of limited room for policy adjustments and rising debt around the world.
Kristalina Georgieva, the new managing director of the IMF, called for policymakers to take seriously their obligations to co-operate on international trade.
She said the problem was no longer the salvoes of mutual tariffs China and the US have been imposing on each other’s goods, but more the unpredictability of trade in the future.
A clear chain of repercussions had begun, she added. It started with trade tensions and uncertainty, which caused a slowdown in investment, falling growth, job losses and ultimately the erosion of confidence.
China’s economy grew by 6% year-on-year in the third quarter of 2019, its slowest rate for almost three decades. Some of the fall is blamed on trade tariffs.
Joyce Chang, chair of global research at JP Morgan, said in a panel at the Institute of International Finance conference that every percentage point fall in growth in China would shave 0.4 points from global growth.
Trump’s belligerent trade policy has had impacts around the world. Julio Velarde, Peru’s central bank governor and chairperson of the G24, told GlobalMarkets that trade tensions would remain for some time, even though the US and China were in the middle of hashing out the first phases of a potential truce.
There are new twists to the tariff wars, too. Velarde added that the US was targeting Mexico now because of migrants. “When you see that tariffs are going to apply to conditions different from trade, almost everybody must be afraid,” he said. “Just the idea to impose tariffs because you don’t do what their president wants is a problem.”