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Why Trade Wars Drag Down Global Growth

“Everyone loses in a trade war.”

That was a key point in IMF managing director Kristalina Georgieva’s curtain-raiser speech on Tuesday previewing the issues to be addressed at IMF’s 2019 annual meetings of the World Bank Group beginning on Monday in Washington, D.C.

According to Georgieva, a global change is needed with countries forging partnerships instead of hiding behind isolationist fears. If they don’t, she issued a stark warning: “For the global economy, the cumulative effect of trade conflicts could mean a loss of around $700 billion by 2020, or about 0.8 percent of GDP. As a reference, this is approximately the size of Switzerland’s entire economy.”

And in order to promote real change with lasting solutions on trade, Gerogieva added, “Countries need to address legitimate concerns related to their trade practices. That means dealing with subsidies, as well as intellectual property rights and technology transfers.”

Global economies today

Two years ago the global economy was in a “synchronized upswing,” with nearly 75 percent of the world accelerating, Georgieva said. Today, the IMF expects to see slowing growth in nearly 90 percent of the world.

Widespread deceleration means that “growth will fall to its lowest rate since the beginning of the decade,” she said. And even though unemployment rates in the U.S. and Germany have plunged to historic lows, advanced economies that include the U.S. and Japan–and especially the euro area–are experiencing a startling softening of economic activity.

Emerging markets such as India and Brazil are seeing a slowdown that’s even more pronounced this year, while in China growth is gradually coming down from the rapid pace it’s seen for many years.

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Georgieva attributes the synchronized slowdown to trade disputes, a key factor that now has pummeled global trade growth into a near standstill. That’s because trade tensions have contributed to a substantial weakening of both worldwide manufacturing activity and investment.

“There is a serious risk that services and consumption could soon be affected,” she said, explaining that disputes now extend between multiple countries and into critical issues. Currencies are in the spotlight again, and because economies are interconnected, many more countries will soon feel that impact, she said. Adding to the problem is uncertainty–driven by trade, Brexit and geopolitical tensions–which is holding back economic potential.

“Even if growth picks up in 2010, the current rifts could lead to changes that last a generation–broken supply chains, siloed trade sectors, a ‘digital Berlin Wall’ that forces countries to choose between technology systems,” she cautioned.

Georgieva made the case for global cooperation. “Our research shows that changes in spending are more effective and have a multiplier effect when countries act together. Or, put another way–if the synchronized slowdown worsens, we may need a synchronized policy response,” she concluded.

A day after Georgieva’s speech, French Finance Minister Bruno Le Maire told reporters that a compromise is needed in the trade conflict between Washington and the European Union to avoid China from profiting from the dispute, according to Reuters. Le Maire, in Luxembourg for a meeting  of euro zone finance ministers, said the separate trade war between the U.S. and China could trim half a percentage point from global growth next year.

Trade talks

The U.S. and China on Thursday restarted trade talks in Washington in hopes of resolving a nearly one-year-old dispute. The two countries are at loggerheads over U.S. allegations that China is stealing technology and trade secrets as the U.S. pushes to ensure protection of American intellectual property assets.

And President Trump on Thursday tweeted: “Big day of negotiations with China. They want to make a deal, but do I? I meet with the Vice Premier tomorrow at The White House.”

Talks are set for Friday afternoon between Trump and Liu He, who led the Chinese delegation that’s meeting with U.S. Trade Representative Robert Lighthizer and Treasure Secretary Steven Mnuchin

U.S. consumer confidence

In the U.S., The Conference Board’s Consumer Confidence Index slipped in September to 125.1 from 134.2 in August. The Conference Board’s Lynn Franco, senior director, economic indicators and surveys, told Sourcing Journal on Thursday, “The decline was due to trade tensions and trade rhetoric. It was similar to the decline in June when we had trade tensions in connection to Mexico. The good news is that it has not translated to any pullback on spending.”

Franco said the Index is still at a fairly high level and that consumers are expected to be spending for the important holiday season, with confidence getting a bit of a boost from the availability of jobs, income and the strong financial markets. She did caution that the spending landscape could shift next year if trade tensions continue, although how consumers react “hinges on the labor market” and whether or not that tightens up.

Global GDP 2020 projections

The Conference Board’s chief economist Bart van Ark said on Thursday at a company presentation in Manhattan that the global economy weakened in 2019 to 2.3 percent growth in gross domestic product, down from 3.0 percent in 2018.

Van Ark now expects that a small recovery will see 2.5 percent growth in GDP for 2020, a rate that should stave off a global recession. “Robust labor markets and strong consumer spending will sustain growth,” he said, explaining that a global recession wouldn’t be in the cards unless there are two consecutive quarters where global GDP shrinks to less than 2 percent.

The U.S. is expected to see GDP growth of 2.2 percent in 2020, with Europe at 1.4 percent and China at 3.4 percent. The U.K.‘s forecasted GDP growth rate is just 0.2 percent, nudging it into recession territory, although Van Ark speculated that the country might already have crossed the recession threshold regardless of whether there’s a Brexit deal or not.

And if a no-Brexit deal emerges, the impact on the economy will depend on how prepared companies are to offset the negative effects from delays in bringing in goods and services across borders with Europe.

The main threat to global GDP growth next year will come from any escalation in geo-political issues, Van Ark said, noting that one critical component of the expected recovery in 2020 centers on the eventual bottoming out of the decline in industrial production.

“A slowdown in industrial production wears on the global economy,” the economist said, explaining that the integration of the supply chains–even though the slump began in China around 2018–is why we are seeing the slowdown spread to other countries.

While mature markets such as the U.S. will likely continue to see slower GDP growth in 2020, emerging markets are likely to benefit from the bottoming out of the industrial cycle, Van Ark added. Some Asian economies, such as Vietnam and Cambodia, will benefit from the reallocation of the global supply chains.