Are the trade wars a harbinger of a new economic downturn? - ERDAL TANAS KARAGÖL

Are the trade wars a harbinger of a new economic downturn?

Even though the trade wars that have erupted between the U.S. and China have had seemingly positive results due to protectionist policies, for the last one and a half years, the negative aspect of these wars has begun to be debated in terms of the share warring parties have in the global market.

International institutions are now openly downgrading global economic growth.

The U.S.-China trade war that was sparked in the first quarter of 2018 has now morphed into an exchange rate war as well, thus becoming a threat for global growth.

We say threat because today, when we consider the production value chain, we see that most technology and industrial products are not produced by a single country, even on a single product basis.

This means that almost each component of a product is manufactured by a different country and represents an input in terms of the final product.

So, imposing foreign restrictions on a certain raw material also deeply affects various countries that use that very same material in different products.

This only goes to show the domino effect that trade wars have on production and trade.

According to a report by the OECD, the deepening trade war between the U.S. and China, the increase of protectionist policies and a return to the tariffs of the 90s will be extremely detrimental to the global economy, production and trade, and that living standards will plummet along with the negative trajectory of global economy.

Will central banks act once again?

Well then, what will a possible economic stagnation lead to?

All eyes will once again be turned toward central banks, even though the trade wars are not their forte, to eliminate this economic slowdown.

It has lately been said that the FED would downgrade interest rates, and that the European Central Bank , in the face of a possible economic stagnation, would also downgrade rates and take various steps in order to palliate the damage done to global growth.

It seems that in the upcoming period the central banks will soon make moves to alleviate the economic pressure of the trade was.

For example, in addition to the European Central Bank (ECB) downgrading interest rates in September, rumors are floating around that a strong asset-buying policy will be announced.

Furthermore, it is being articulated that the FED too will once again downgrade interest rates in September.

However, as FED President Powell said that the FED’s money policies may not be able to fix the damage trade wars have wrecked on investments, market confidence and global economy growth suggests that the damage is graver than expected and leads to expectations that trade policies will be put into effect.

So even though central banks have made the necessary moves to mitigate the effects of the possible global risks of the trade wars, there is still a need for new regulations that will solve the problems in the field of trade, especially since the WTO cannot fulfill the regulations and sanctions need to be put in place in the field of trade.


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