The Scientism Of Trade Wars

One year ago, last October, the IMF published an update to its World Economic Outlook (WEO) for 2018. Like many, the organization began to talk more about trade wars and protectionism. It had become a topic of conversation more than concern. Couched as only downside risks, the IMF still didn’t think the fuss would amount to all that much.

Especially not with world’s economy roaring under globally synchronized growth. Even though there were warning signs already by then, the idea was that the upturn in 2017 had been a true recovery trend. That’s not something that gets upset easily and it wasn’t expected to.

The steady expansion under way since mid-2016 continues, with global growth for 2018–19 projected to remain at its 2017 level.

The IMF acknowledged that these downside risks shouldn’t be taken lightly, but overall it did not expect they would end up as more than historical trivia. More annoying than alarming. What were they? The IMF didn’t really know, citing pretty much everything:

The downward revision reflects surprises that suppressed activity in early 2018 in some major advanced economies, the negative effects of the trade measures implemented or approved between April and mid-September, as well as a weaker outlook for some key emerging market and developing economies arising from country-specific factors, tighter financial conditions, geopolitical tensions, and higher oil import bills.

That first sentence is the key one. As we’ve noted ever since early 2018, it wasn’t trade wars, trade tensions, or tariffs that provoked a spreading and worsening economic backlash. It began right in January, following a December in 2017 full of warning signs in the one place where it always matters.

The global dollar market, the eurodollar system.

Germany is a perfect example of what I mean. The engine of Europe’s economy is defined – at the margins – in large part by global trade and global growth. Susceptible therefore to monetary swings, the sudden change in manufacturing and exports proposed already serious consequences from the shift in monetary conditions.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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