With the halt of negotiation talk from the Chinese representatives expressed on Friday, trade war fear escalation was again thrown into focus. China markets represented by Shanghai Composite index dropped immediately down 2.45% after such news on Friday, May 17th. All major US equity markets were not spared from such new development; all were down at market close subsequently. European markets had the worst performance on Friday market close in conjunction with their own Brexit issue complication. The entire picture painted was fear, nothing but fear of global recession coming if full blown trade war ignited.
In fact, all major market sell-off in the past several years has to do with the fear of the coming global recession. Those events include Greek crisis, China market hard landing, North Korea missile threats, and recently trade war initiated by US against China around second half of 2018. All resulted global market jitters. Those who fleet market at those critical times are the losers and regrettable weepers. Because right after that short time, market resumed business as usual, went up and created numerous historical heights since after then.
So, the same question now poised to us is that will such nut event happen again?
World Economies Interconnected
For me personally, I don’t think so (But I would wish such big crash happen again so that we can take advantage). If you have read my previous post, you will understand that the same event repeated again and again, market seems to get numb to its effect. Investors will move on shrugging off such overblown catastrophic effect.
The major argument for the continue trade war will bring in global recession based on the presupposition that the global economic growth is unavailingly interconnected and inseparable from each other. This presupposition assumes that no economy in any single country of the world can survive without depending on the other country for mutual trading activities, let alone growing one’s economy on its own.
This could be absolutely true for any primitive country that lacks the skills and resources to develop its own. Foreign investors from advanced countries are most needed to come in bringing capital and skill to help start up a left behind economy. While for a country like the US, who has advanced and comprehensive economic structure, ample natural resources and advanced skill of know how’s, the scenario might not fit into such category.
Economic Power House
US has been the economic power house of the world for about 100 years or so in the past. It has been so strong that the entire world dependent on it for self benefit and subsequent growth, including Asian countries like Japan, South Korea, the Asean and lately of course China. It is so much so that is a common saying that every time US has a sneeze, the world get a cold.
In short the world economic health is dependence on the US condition, not the other way around. This point is proven during Asian economic crisis during 1997-98. Advanced economies like the US, Europe or even Japan are not affected that much as in Asian developing countries. Because Asian countries are the recipients or beneficiaries from those advanced economies and the cause of the crisis started within Asian itself. Though it was later on spread further to Russian and South America, it was then called a global financial crisis. But it did not hit US shore badly.
Trade War Losers
While there were many predictions that the US economy will be negatively affected when it tried to initiate trade war with other countries like Europe and China, it did not happen so far, however. In fact, US has already imposed tariff hike against several countries with respective products, and others have also retaliated the same or similar measure against the US. But the US economy is all the more getting stronger while other countries like Asian economies including China, or even European countries are badly in shape now. Could this phenomenon explain that it is all because of the fact that the rest of the world was deeply indebted to US for economic growth but not the other way around?
What we can see about the trade war frontline is that all other countries though are very angry with what President Trump is doing, changing rules of the economic game, but at the same time, they realize they are deeply dependent on the US for self benefit? That’s the reason why they are all showing desperation for the trade talk with the US in order to avoid further trade conflict, because they are more vulnerable than the US. But, of course none of them wants to admit because of obvious reason.
If this trend of development doesn’t change very much in the next couple of months, I would presume that US will not face economic recession for the next 2 years or so even if a full blown trade war ignited. However, regional recession might come around Asia countries including China, the second largest global economy, and the European countries will not be spared, let alone those smaller economies under the developing category.
For my humble personal view, nothing is going to stop the US for Trump implementing his protectionism policy, not even the next Presidential election. Other countries have to wake up the sooner the better. They have to realize that US is no longer a country they can depend on for their own economic growth anymore. Unless they, the victimized countries work their way out, they will remain down forever. However, with the wise and hard working people of China and its focus on new cutting edge technological innovation, I believe a new era of global trade relations is about to unfold itself.
Things will get better and stronger but next global scenario will emerge uniquely different. (Please refer to my previous blog, the Great Tectonic Shift). I shall write more on this perspective in upcoming blog if time permits. So please stay tune, and subscribe if you want to consider how to prepare in advance how to move your capital and position for better future.
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to conclude individual decision.