US trade measures could trigger new global crisis

Source:Global Times Published: 2018/9/6 20:03:14

Illustration: Xia Qing/GT

Given the recent trade friction provoked by US President Donald Trump, there has been increasing concern over the impact of protectionism on global economic growth. There is a danger that financial risks may interact with each other to become bigger, eventually forming a "perfect storm." And there are already signs that a new financial crisis may be brewing.

First of all, the global financial crisis hasn't been fully overcome. For instance, global debt has soared. According to the quarterly report published by the Institute of International Finance in April, global debt climbed to $237 trillion in the fourth quarter of 2017, more than $70 trillion higher than a decade ago and bringing the debt-to-GDP ratio to more than 300 percent. The report also noted another worrying sign: With global interest rates starting to rise, the household debt-to-GDP ratio has reached a high level in many developed countries. Belgium, Canada, France, Luxembourg, Norway, Sweden and Switzerland have all seen their household debt-to-GDP ratios hit all-time highs.

Furthermore, there are bubbles in global asset prices. Since the end of the 2008 financial crisis, there has been a significant deviation of global asset prices from the real economy. Since January 2009, the yields of European high-yield bonds and the Standard & Poor's 500 have gained significantly. But US nominal GDP as well as salary levels in the US and Europe have risen slowly. The surge in housing prices is the most apparent example. After the financial crisis, ultra-low interest rates and the gradual global economic recovery pushed up housing prices, while institutional investors also added leverage and further inflated property prices, resulting in global housing price bubbles.

Second, danger signs have been on the rise in emerging markets recently. Currencies in emerging markets have seen significant depreciation. Take the Turkish lira as an example. After the US announced it would double its tariffs on Turkish steel and aluminum on August 10, Turkey's currency fell by nearly 20 percent. Other emerging market countries also face growing risks from being exposed to the domino effect of the currency crisis as the lira's jitters hit other currencies like the Argentine peso, the Brazilian real, the Russian ruble, the Indian rupee and the South African rand.

Moreover, stocks in emerging markets have also suffered sharp falls. Starting from February, financial markets in emerging economies and the US began to diverge. The Standard & Poor's 500 has gained more than 6 percent this year, while the MSCI Emerging Markets Index lost at least 8 percent. The Turkish currency crisis has prompted investors to sell off emerging market assets, thus hurting the stock markets in South Africa, Russia, India and other major developing countries. In the meantime, commodity prices have plunged, fueling anxiety among investors.

Finally, the global financial and economic system is deteriorating amid the trade war. Given the trillions in dollar-denominated debt, a dollar shortage could put global trade in jeopardy. Non-US banks often issue a great number of letters of credit denominated in the US dollar. But since non-US banks rely on the wholesale market to obtain the dollar, international trade could be weakened if there is a shortage of dollars in these banks. Even worse, trade friction may escalate into a currency war. If a currency war breaks out, countries may ban foreign investors from entering their financial markets or deliberately reduce foreign investment so as to tighten political control over capital flows.

Data from BIS showed that dollar-denominated debt borrowed by non-bank borrower outside the US amounted to $11.5 trillion by the end of the first quarter of 2018, so a tightening monetary environment in the US will have a negative impact on financial markets in other countries in the long run. Policymakers in developed economies have been urged not to ignore the growing evidence that sudden weakening of exchange rates reduces investment and economic growth in emerging markets. Since weaker economic activity curbs demand for exports from developed economies, every country will be impacted actually. In the long run, protectionism will only bring pain, both for the US and the rest of the world.

The current market situation is evolving toward the outbreak of systemic risks. Unlike the 2008 financial crisis, which started from the financial market system, a new financial crisis this time will be caused mainly by human factors, with a trade war being the trigger.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.

Posted in: INSIDER'S EYE

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