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Be realistic on Brexit and US-China trade war, or risk massive fallout

52 0 4
16.02.2019

Two major divorces are in the making in March. The obvious one is Brexit, which officially occurs on March 29. The other is the deadline for the US-China trade negotiations on March 1, when US tariffs on US$200 billion worth of Chinese imports are set to increase from 10 per cent to 25 per cent. Even though progress is likely, as both sides want a deal and the market is expecting one, the gap between the two sides is still daunting.

Both negotiations have profound implications for the future. Like all divorces, the disagreements are acrimonious, with repercussions for everyone else involved.

So far, Britain seems to be bracing for a major slowdown, deal or no deal. The British statistics office reported that the country’s economy grew only 0.2 per cent in the fourth quarter of 2018, with growth falling in December.

As Bank of England governor Mark Carney warned in his global outlook this week, global expansion is now weakening and risks are intensifying because worldwide monetary policy has been tightening, trade tensions increasing and China’s economy slowing. The more important risk he identified is the reversal of globalisation, caused by the growing imbalance on trade due to the continued US current account deficit even as the US dollar has been more dominant than ever.

Interestingly, China is no longer the major buyer of dollars, as its foreign exchange reserves have remained flat. The US current account deficit will be funded more by Japan, through its quantitative easing, and the euro zone. Expect US trade pressure also on Japan and the euro zone.

The second risk to globalisation is social, with greater imbalances in........

© South China Morning Post