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The Initiation of Trade Wars? Battles? Skirmishes?

A review of the issues and challenges

COMMENTARY

The biggest current threat to global growth is a trade war. There are other risks, too. The U.S. Federal reserve is unwinding quantitative easing and raising rates, but is making the policy shifts very gradually, with careful market guidance. Governments are focused on whether they need to cut taxes, not raise them; so, no growth risks from fiscal policy. Consumer confidence is relatively high around the world, from mature industrial countries to young emerging-market nations. Equity market valuation might appear high to some, but stock market corrections do not cause recessions unless there is a financial panic – and systematic risks from financial institutions are much lower than when the last crisis occurred in 2008. After considering the other risks, we stand by our analysis that if the current synchronized global economic expansion is derailed, the most likely cause will be a trade war. YET, we are optimistic. So far, the actions taken earn only the terminology of “Skirmishes”, but if they escalate to “Battles” and then a “Trade War”, we will need to re-assess the risks. Here is our review of the issues and challenges.

The trade skirmishes began in earnest in March 2018 with the US imposing tariffs on steel and aluminum in the name of national security. The US temporarily exempted Mexico and Canada pending progress on the NAFTA negotiation, held open the possibility that other countries might be exempted, but did not exempt Europe. The European Union is expected to retaliate with highly focused tariffs, from jeans to bourbon to motorcycles, designed to hit some hotbutton pain points involving name-brand companies. Later in March, the US leveled tariffs on China, aimed at intellectual property.

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