Trade war threatens the global economy

Thursday - 05/04/2018 05:52
Protectionism, driven by the US Administration, is a threat not only to the US but is causing the global economy the risk of a trade war. The political, economic and cultural ties that bind finance and business closer together threatens to unravel, warned a new report from risk management services.
Trade war threatens the global economy
Trade war threatens the global economy
Risks and Opportunities in the $74 trillion Global Economy report assesses the risks and opportunities of the top 10 global economies. In its ranking, the US is the no. 1 interconnected country, but the most significant threat that it faces now is protectionism, reinforced by the recent steel, amid other business tariffs on Chinese imports, levied by the Trump administration.
 
Some common themes that the report found apply globally across countries include challenges of protectionism, opportunities provided by new technology, the challenge of over-leveraged banks and the value of e-commerce opportunities.
 
The top 10 global economies by GDP are as follows, with China, Japan and India from Asia in the list:
 
Top Ten Ranking (GDP in brackets)
 
1. United States ($18.03 trillion)
 
2. China ($11 trillion)
 
3. Japan ($4.38 trillion)
 
4. Germany ($3.36 trillion) 5. UK ($2.86 trillion)
 
6. France ($2.42 trillion)
 
7. India ($2,09 trillion)
 
8. Italy ($1.82 trillion)
 
9. Brazil ($1.77 trillion)
 
10. Canada ($1.55 trillion)
 
China (No.2, $11 trillion)
 
Risk: geopolitical volatility
 
China is facing manufacturing exodus and increased geographical competition from other countries in the region offering quality manufacturing at a cheaper price. Even Chinese companies are looking outside their own borders when it comes to investing in factories. The report said China has to consider how to achieve a sustainable balance between economic growth without triggering geo-political conflict with its neighbours.
 
With the crucial determinante in China’s Geopolitical status is Premier Xi Jinping who has been in power since 2012, the recent removal of time limits on his leadership, marking him the most powerful Chinese leader since Mao Zedong. Power concentrated in the hands of one man can be ‘intoxicating’, said the report. Another risk for China is crisis with its rivals such as Japan over the Senkaku Islands or with the USA over North Korea.
 
Opportunity: consumer economy
 
The silver lining for China, according to the report, is its maturing and strong economy, from more of a manufacturing-based one to a consumer-based one, which is able to support China even as manufacturing declines. This is especially since consumer sentiment is rising, with a strengthening yuan, higher disposable income and millennial wage growth.
 
Japan (No. 3, $4.38 trillion)
 
Risk: Sovereign debt
 
Some analysts have expressed concern that by continuing to pursue its expansionary monetary policy, the Bank of Japan could cause the markets to overheat and create another bubble. Economist Takeo Hoshi, chair of the board of the Tokyo Foundation said: “The current quantitative easing policy is on a different scale from anything seen previously. The BOJ has been increasing its holdings of Japanese government bonds at a rate of some 80 trillion yen annually, and this can’t go on indefinitely. The government has probably reached a limit on what it can accomplish through fiscal policy. Japan’s public debt has continued to balloon each year; they can’t keep up this level of deficit spending much longer.
 
Opportunity: Expansionary Fiscal and Monetary Policies
 
What is looking up is that the Japanese economy is growing and hiring is up. Although the number of advanced elderly stemming from its baby boomers will have a huge impact on the budget, a healthier economy could signal higher wages, leading to growth in disposable income and eventually boost consumer spending to fuel further growth, which Mr Hoshi credited to the expansionary fiscal and monetary policies of “Abenomics”. QE has succeeded in stemming deflation, but monetary policy can only stimulate demand which may not necessarily translate into a commensurate increase in economic growth.
 
India (No. 7, $2.09 trillion)
 
Risk: SME financing
 
More than 50 million small and medium sized businesses (SMEs) currently exist in India and over the last five decades, the SME sector has grown dynamically and makes up 40% of India’s exports, creating millions of jobs annually, said the report. Despite the growth potential, SMEs in India score low marks for marketing their products, which is constraining the sector. They are also constrained by the scarcity of budget, which in turn has limited their growth ambitions.
 
The continuance of low technology use by SMEs has always resulted in low productivity, rendering them uncompetitive in the ever-widening global market. The most significant constraint to the growth of SMEs in India relates to inadequate capital and credit facilities. Difficulty in obtaining an easy and timely credit is reportedly a crucial factor hampering SME growth. SMEs also face regulatory challenges in construction permits, resolving insolvency, collateral securities/guarantees, and taxation.
 
Opportunity: Technology Capability and E-commerce
 
To stave off the challenges, the report proposed that SMEs could make their presence in the online world by going digital and leveraging e-commerce. Adoption of technology: embedding the social and cloud platform will open up vast opportunities for revenue growth and operational efficiency. Taking advantage of Government schemes: initiatives such as ‘Make in India’, ‘Start-up India’ and ‘Skill India’ are schemes introduced by the government designed to promote an entrepreneurial culture.

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