The world is embarking upon a new global trade war, and the size and scope of international broad-based tariffs could spark an economic contraction and produce a 2008-level crisis in terms of worldwide trade. So warns the World Bank in the summer edition of its Global Economics Prospects report.
Over the last few weeks, a whole host of tariffs have been imposed by multiple states. The U.S. slapped steel and aluminum levies on Canada, Mexico, and the European Union. Canada retaliated with taxes on $16.6 billion worth of goods, Mexico is reportedly targeting U.S. pork, and the EU will institute tariffs on many agricultural products.
And this is just the beginning – you better buckle up.
World Bank Worried About Trade War
The multinational financial institution recently published a grim assessment of the global economy, prognosticating that growth is anticipated to decelerate in the next two years. Emerging and developed markets are projected to plateau in 2019 and 2020 at 4.7%, up from 4.5% in 2018, amid the intensification of tariffs and import restrictions and a myriad of other developments.
Report authors focused mostly on the trade war brewing between the major economies, such as the U.S., China, Canada, and the European Union:
“A broad-based increase in tariffs worldwide would have major adverse consequences for global trade and activity. An escalation of tariffs up to legally-allowed bound rates could translate into a decline in global trade flows amounting to 9 percent, similar to the drop seen during the global financial crisis in 2008-09.”
But it could be the emerging market economies that bears the biggest brunt of a surge in protectionism. Because developing nations rely on the strength of major countries’ economies for their own growth, heightened trade tensions could slash their growth levels by as much as 1.1%.
Other Factors to Hurt Economy
Researchers cited a wide array of other aspects that could further slow the global economy by 2020.
Over the last year, major central banks have started to unwind their accommodative policies. The Federal Reserve, for example, has begun to gradually raise interest rates and decrease its $4.5 trillion balance sheet. The Bank of Canada, the Bank of England, the Reserve Bank of India, and many others have pulled the trigger on rate hikes, though they have taken a slow and steady approach.
Although these are theoretically signs of a healthy economy, they could also lead to multiple consequences. With the removal of monetary accommodations and the measured end of cheap money, there might be a steep contraction in global credit and a decline of investment growth.
At the same time, a decade of money-printing and historically low interest rates has contributed to record debt levels. In total, global debt has topped an all-time high of $233 trillion, up from just $87 trillion in 2000. But some nations’ enormous debt volumes may be riskier than others, including China, the U.S., and Japan, notes the organization.
With the world economy reaching full output, now would be an opportune time to find ways to sustain growth, it stated.
World Bank Upgrades Economic Forecasts
Despite the dire warnings from the World Bank, it is still optimistic about growth in the near-term. It upgraded its economic forecasts for the world’s major economies in 2018 and 2019:
- S. growth will jump 2.7% this year and 2.5% next year.
- Euro-area nations will grow 2.1% and 1.7%.
- Japan will see a 1% and 0.8% boost.
- China will expand 6.5% and 6.3%.
For the next two years, economies are expected to be robust. It’s what 2020 and beyond brings they fear.
‘Governments Never Learn, Only People Do’
Legendary economist Milton Friedman famously uttered, “Governments never learn, only people do.” This quote can easily be applied to trade as politicians enact 18th century policies and leaders retaliate with even more fatuous tariffs that will only hurt average folk, help special interests, and give the illusion that governments are doing something. It is said that war is a racket, but so is protectionism.
What do you think of the World Bank’s report? Let us know in the comments section!