Trump insists that the US economy is strong and says he's not worried about a slowdown. Then again, he also said trade wars are easy to win; he maintains China is the one paying for the tariffs he imposed on Chinese imports; he made a mantra of saying Mexico would pay for a border wall; and his administration insisted that Trump's tax cuts would pay for themselves. All of these claims, of course, are demonstrably false. Facts are, shall we say, not a priority.
While Trump may deny that his trade war with China could trigger economic turbulence in the United States, other countries are already feeling the impact. And that impact could be far-reaching — in some cases, outliving the tariffs.
That's why during the G7 summit in France, the group's members argued against launching trade wars. And European Council President Donald Tusk spoke bluntly of "senseless disputes," warning that "trade wars will lead to recession."
In fact, Trump's economic policies have already contributed to sharp declines. Across the globe, countries are slashing growth forecasts, pointing to the US-China dispute as a major factor.
Consider the case of Argentina. There, President Mauricio Macri, a market-friendly former businessman, became president in 2015, vowing to reverse the disastrous policies of his predecessor, the leftist populist Cristina Fernandez de Kirchner. Macri's plans to boost growth by allowing market forces back into the economy ran into trouble first when the country faced one of its harshest droughts on record, which took a painful toll on the economy, particularly on exports.
Then, as Macri prepared to run for re-election, Trump began slapping tariffs on Chinese goods. In a calamitous vicious cycle, the trade wars sent investors fleeing to safety, causing the local currency to plummet. Argentina's central bank raised interest rates to try to support the peso, fueling inflation, depressing economic growth and, amid deepening economic discontent, sparking fears among investors, the business community and many Argentineans that Macri would lose re-election.
As I outlined elsewhere, Macri is now caught in the tightening vice of a political paradox. Investors worry the left will regain power and depress investment, thus worsening the crisis and improving the chances for the opposition. This is all aggravated by uncertainty over global trade — which is keeping investors everywhere in suspense. The political impact could be long lasting. Argentina's presidential choice this fall will be in office for years to come.
It's not just Argentina. Earlier this month, Dutch economists slashed the nation's official growth forecast for next year to just 1.4%, blaming an "ill wind sweeping in from abroad." The Netherlands is not alone in wondering nervously what the future holds. The fact is, nobody knows what lies ahead for the global economy.
Look at Germany. The country now stands on the edge of a recession precipice. The government statistics agency just reported that the economy shrank by 0.1% in the second quarter. Germany's central bank is predicting the third quarter will also post a decline. That would meet the formal definition of a recession — two consecutive quarters of economic contraction. If Trump moves forward with more tariffs, it will almost assuredly worsen the recession.
And if Germany sneezes, Europe is likely to catch a cold. Germany is the behemoth of the European Union, accounting for more than a fifth of the EU's economic output in 2017. If Germany starts making fewer cars, for example, its suppliers in the Netherlands, Italy, Poland and elsewhere will see orders drop, production slow and unemployment grow.
This is the time when a global coordinated response to economic headwinds would be the natural response. That kind of cooperation, spearheaded by the United States, is what helped end the Great Recession a decade ago.
This time is different. Multiple signs are pointing to trouble. Oil demand is waning, industrial output is declining in many places (including the United States) and reliable indicators such as interest rates strongly suggest a recession is ahead.
What's more, Trump's fondness for trade clashes shows no sign of easing, adding to the headwinds already pushing against economic growth around the world. Trump and his Commerce Department have claimed that foreign car imports are a threat to national security. And now, as it has become evident that the trade war with China is not easy to win, he may be preparing to impose tariffs on European cars, which would especially hurt German automakers.
Many forces, of course, contribute to economic performance, and even the best forecasts can be derailed by unexpected events. The impending Brexit quake is sure to trim European growth, Italy is in crisis, climate change is creating new problems and China is facing a slowdown.
To be sure, the trade war with China is not based on an imaginary problem. China has not been a fair player in trade, and if Trump's policies somehow end up bearing fruit, many would cheer. In the meantime, however, the pain is spreading, and critics maintain there are better ways to tackle the problem, including working together with allies — not repeatedly threatening them.
Trump's response to his critics and to claims that he risks triggering a recession, at least in public, is characteristic bravado and boasting about the greatness of his own performance in guiding the economy. Just when the world needs American leadership to solve a common problem, it turns out the United States is one of the main sources of the ill winds blowing around the world.
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