- Several economists have flagged the US-China trade war as a major challenge for the global economy. Christine Lagarde, incoming European Central Bank President, has similar views.
- Lagarde resigned from the IMF earlier this month, subsequent to her nomination as ECB President. The IMF also sees trade uncertainty as a risk for the global economy.
Christine Lagarde on Trump’s trade war
In a CNBC interview, incoming European Central Bank or ECB President Christine Lagarde expressed her views on the trade war. Lagarde said, “I think the threat against trade at the moment is the biggest hurdle for the global economy.” She added, “The longer this lingers, the more uncertainty sinks in.”
Calling the trade war a “big, dark cloud on the global economy,” Lagarde also said companies wouldn’t invest in such an uncertain policy environment. Notably, corporate investment activity has been weak in China as well as the United States.
Christine Lagarde also discussed the reorganization of global supply chains. Incidentally, just today, Apple (AAPL) announced that it would produce its new Mac Pro in Texas. Stung by Trump’s tariffs, several US companies are planning to reorganize their supply chains. Reportedly, Amazon (AMZN), Alphabet (GOOG), and Microsoft (MSFT) are also looking to diversify their sourcing from China.
The trade war and US companies
Trump’s tariffs have worried several US companies that do business in China. These include companies that procure from China as well as companies that sell their goods in China.
Last year, Amazon, Alphabet, and Apple opposed Trump’s tariffs. In the short term, the trade war and Trump’s tariffs are bringing a lot of uncertainty to US companies.
Christine Lagarde also said that the US-China trade war and tariffs would lower global growth by 80 basis points in 2020. Earlier this year, the IMF also lowered the global growth forecast. It expects 2019 global economic growth to be the slowest in a decade.
In an apparent reference to Trump’s trade war, the IMF called the global slowdown “self-inflicted.” Several other economists also believe that escalation in the US-China trade war could push the global economy toward a recession.
US-China trade war
To be sure, US-China trade relations have been pretty uncertain and volatile. After last month’s escalation, we saw some de-escalation in September. But then last week, the Chinese delegation canceled its planned visits to US farms. The move raised fears that all is not well in US-China trade relations. Betting on the outcome of the US-China trade war has been a futile exercise so far. A single tweet from President Trump can change sentiment in an instant.
With so much uncertainty over trade relations between the world’s two biggest economies, it’s no surprise that companies are keeping a tight hand on their purses. Add the Brexit uncertainty to the mix, and companies have one more source of volatility hanging over their heads.