[New Year Interview] "US-China Trade War Risk Remains This Year... Spreading to Europe"

Nariman Berabeshy IHS Markit Senior Economist

Temporary Truce Achieved with Phase 1 Agreement... But the Agreement Details Remain Unreleased

Uncertainty Persists Due to Difficulty in Predicting Direction, Hostility Among Countries May Rise Again

Trump's Trade War Shifts Focus to Europe

Europe, Already with Zero Interest Rates, May Face Greater Shock from Trade War

Nariman Berabeshy, Senior Economist at IHS Markit

[Asia Economy Reporter Eunbyeol Kim] "The biggest risk to the global economy in 2020 is policy mistakes, especially trade policy mistakes. Hostility caused by the trade war could escalate again and spread to other regions like Europe, excluding the US and China."

Nariman Behravesh, Chief Economist at IHS Markit, responded this way when asked about the biggest risk to the global economy this year in a written interview with Asia Economy at the start of the new year. Behravesh is a macroeconomic expert well-versed in international issues such as exchange rates and global oil prices, having served as an economist at the US Congressional Budget Office, the Federal Reserve Bank of Philadelphia, and as Chief International Economist at S&P.

To summarize the risk he emphasized in the interview in one word: 'uncertainty.' Since the US and China are expected to soon sign a Phase 1 trade agreement, there is analysis that a truce intention has been expressed. However, the detailed agreement has not yet been disclosed, making it difficult to even predict the direction of trade policy for the time being, according to him.

He pointed out, "Although the trade war has achieved a temporary truce, hostility among countries can rise again. The Trump administration seems to believe that tariffs and trade measures are the answer to all of America's problems, including the trade deficit, but this has very dangerous effects on economic growth and financial volatility."

Recently, the focus of the US trade war has shifted from China to Europe. The US declared retaliation against European companies, stating that Airbus received unfair government subsidies from the European Union (EU), harming US companies, and imposed retaliatory tariffs on $7.5 billion (about 8.6 trillion won) worth of European imports. European countries introduced digital taxes targeting US companies, and the US has also vowed retaliation against these. Experts interpret the Trump administration's conclusion of the US-Mexico-Canada Agreement (USMCA) and temporary pause in the US-China trade war as a strategic move to concentrate firepower on the EU in the new year. This means the global economy cannot be free from trade wars triggered by US President Donald Trump in the new year. Especially in Europe, where zero interest rates have already been introduced and economic growth rates are low, there are concerns that a full-scale trade war could cause significant shocks.

Behravesh also identified the continued slowdown in growth in China and advanced countries due to the trade war as the most negative factor for the Korean economy. This is because the slowdown in growth of large economies can negatively affect Korea's exports. He also cited geopolitical issues such as North American nuclear negotiations involving China as negative factors for the Korean economy this year, as foreign investment in Korea could sharply decline.

He said that US-led trade tensions and conflicts seem to have already become a new global trend. He added, "It will take a long time for the already very high level of protectionist trade barriers to decrease. Global rules have already changed and are likely to change even more in the future." As an example, he pointed to the collapse of the World Trade Organization (WTO). Since President Trump prefers bilateral agreements over resolving trade disputes through the WTO, this phenomenon results in the weakening of multilateral agreements worldwide. Behravesh emphasized, "With the so-called 'era of strongmen' including President Trump, Russian President Vladimir Putin, and Japanese Prime Minister Shinzo Abe, the influence of rules and treaties that have prospered the global economy for the past half-century is diminishing. Societies dominated by strongmen seem more unpredictable. This is clearly a negative factor for economic growth and financial markets."

Despite the trade war, he evaluates that current economic indicators are performing well. In particular, the US recorded a 2.1% GDP growth rate in the third quarter of last year, and manufacturing indicators, which had been declining in various countries, are rebounding. Behravesh attributes this to the proactive responses of central banks. He assessed, "Central banks, sensing a recession risk, implemented a 'U-turn' policy by adopting accommodative measures, which was positive."

However, he pointed out that the global monetary easing cycle that had continued so far appears to be over. Since central banks have already implemented 'insurance rate cuts' in preparation for a recession, the likelihood of additional rate cuts this year is low.

Behravesh explained, "The fact that the US Treasury yield curve is no longer inverted reflects that the market perceives less risk." The situation with the European Central Bank (ECB) is more complex, but recently negative opinions about negative interest rates have emerged within the ECB, so any further rate cuts are expected to be carried out very cautiously.

Despite the uncertainty, he forecasts that the possibility of a recession in 2020 is not high. He lowered the recession probability from 30% to 20%, and expects global economic growth to be 2.5% this year, improving to 2.7% next year.

This content was produced with the assistance of AI translation services.