SHOULD WE STILL CALL IT A TRADE WAR?
The world has been going through tough times. That is for sure! Trade wars full of tariffs, currency wars full of fluctuations and manipulations, unrest with people screaming for equality have surrounded the world. The global economy could cope with them one at a time but it takes lots of effort to cope with all of them in one go.
For more than a year, trade war between the US and China has been the hottest topic in the global economy. Tariffs after tariffs, threats after threats were all over the place and it looked like there was no end. Fortunately, the United States’ general presidential election is getting closer, which led to the de-escalation in the tensions between these two superpower economies. US President Donald J. Trump has announced a “phase-1” agreement, which has been a temporary but a crucial relief for the world. On the other side of the Atlantic, the Brexit saga has been harming the economies of the UK, the European Union and the world, but who even cares? Brexit is delayed again. What is obvious is that it is better than a no-deal Brexit but the ongoing uncertainty is not helping either.
From Hong Kong to Chile, 2019 has been the year for street protests. Unrests and protests are erupting around the world, but what is sparking them? What is happening to the world? Is the global economy running out of road? These questions have been the talk of the town.
The global economy has lost its momentum in the quarters. Luckily, we are still a few steps away from “recession” but measures must be taken before arriving to that undesired place. The most common mistake that has been making decisions before analyzing the current situation. There have been various arguments about the reasons for the global economic slowdown. US-China trade war that officially took off in January 2018. Since then, the climate of protectionism has been holding back the needed risk appetite in global economy. China’s economy had been growing rapidly for the last few decades, which was curbed by Trump and his administration. The trade war has been bigger than just trade, as it includes currency and technology wars alongside it.
As Trump kept on imposing tariffs on Chinese goods, China let its currency; Yuan depreciate against the US dollar to compensate the negative effect of the US tariffs. The parity of USDCNY had experienced a hike jumping from ~6.40 to ~7.18 since January 2018. It can be said that the hike in the USDCNY parity was directly proportional with the escalated tension between the two countries.
China allowed its currency to depreciate but there were several obstacles to let the exchange rate increase. China’s private sector has considerable debt in US dollars so it hurts the private sector to see the US dollar gain against the Chinese Yuan. Letting the Yuan depreciate more would inch up the risk of increase in inflation rate in China, which would accelerate the pace of the economic slowdown and the need for an increase in interest rate. Thanks to the US’s general presidential elections that will take place in November 2020, Trump deescalated the tensions by announcing “phase one” agreement between the US and China. As we see the tensions deescalate between the two-superpower economies, the USDCNY exchange rate has come back closer to the level of 7.05 as of the first day of November 2019.
There are more examples of currency wars. EURUSD has been under the spotlight for long time. The Eurozone has been fighting with the problems of economic slowdown and low inflation for a very long time. European Central Bank has been applying strong monetary policies by cutting the deposit rates below zero percent but it has not yet been proved that it is the solution for stimulating the eurozone’s economy. In addition to rate cuts, ECB also announced a policy that can be called QE and we will see the effects of this in near future. As most of the monetary policies seem not to be working in terms of stimulating the eurozone’s economy, allowing EURUSD to depreciate has been the biggest precaution taken leading to the slowdown of the eurozone. By allowing exchange rate to weaken, the eurozone has become much more competitive in terms of international trade, which decelerated the economic slowdown in the EU. What is certain is that the downwards move in EURUSD has irritated Donald Trump.
Until the trade war between the US and China, the global economy was not running but at least it was walking. Then the negative effects started to spread like a virus like a snowball effect. Metaphorically, a snowball effect is a process that starts from an initial state of small significance and builds upon itself, becoming larger, and perhaps leading to dangerous or disastrous consequences. The negative effect of trade war grew bigger and bigger as it trundled along. Firstly, it started to accelerate the slowdown of the Chinese economy, which then slowed down the global trade. It is important to state that China is both the biggest producer and importer of raw materials (commodities) in the world. That allowed the illness of the economic slowdown to spread to both emerging and developed markets too. As risk appetites were lost, global investment slowed down, which was one of the main reasons for most commodities’ prices starting to fall. It hurt many sectors such as the mining sector.
The trade war is not the only reason for global economic slowdown. It can be said that, the global economy was in the process of a slowdown anyway and the trade war forced the pace of that slowdown. It is not a coincidence that the unrests all over the world have come right after the trade war.
Under the leadership of the Federal Reserve of the US, many of the public authorities such as central banks all over the world have been trying to take measures against the economic slowdown as well as the low inflation in their countries, regions and the world. The FED cut rates in July 2019 for the first time in the last ten years and that was the start of the trend of cutting rates all around the world. Cutting the interest rate is a type of a monetary policy applied by central banks aiming to stop the economic slowdown or escalate the pace of economic growth. The FED has been cutting rates since the monetary policy committee meeting took place in the last week of July 2019 and this is what most of central banks have been trying to do for the last couple of quarters. However, it does not seem to be working in stopping the economic slowdown.
The economic slowdown can be stopped by the efforts of public institutions such as central banks and governments. However, these efforts are only beneficial if these institutions collaborate to have access a positive outcome. In today’s modern world, populist and protectionist policies applied by governments diverge with the efforts of central banks and their monetary policies. This divergence makes it crystal clear for us to see that central banks’ monetary policies are not working anymore as it was before the global financial crises in 2007-2008. Therefore the, global economy does not develop just by economic political measures but reasonable and rightminded policies by politicians.
Even we are not that optimistic for 2020, it is not expected to be worse than 2019. Even the dollar index has been on the falling trend these days, it will be tough to take DXY down with rate cuts and Trump’s tweets in the long run. Most of the commodity prices have been suffering for too long but the freefall of the prices seem to slow down in 2020. In fact, the commodity prices will probably show some signs of life.
