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Macroscope
OpinionComment
David Brown
David Brown

Macroscope | A trade war truce? The US and Chinese economies need one, but they also need domestic reforms to stave off global catastrophe

  • The US’ overreliance on expansionary fiscal policy when the country is already deeply in debt is a recipe for disaster
  • Beijing, for its part, needs reforms to spur domestic demand, not currency depreciation that could further provoke the US

Reading Time:3 minutes
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US Trade Representative Robert Lighthizer shakes hands with Chinese Vice-Premier Liu He at the Xijiao Conference Centre in Shanghai on July 31. Chinese and US negotiators held talks in Shanghai in a bid to bring the year-long trade war to an end. Photo: AFP
David Brown
The world economy is on the brink of something nasty. Stock market valuations have seemed overstretched for a long time and pessimists have been looking for a good excuse to sell for months. It has been a tough call considering the deluge of cheap money flooding the markets and the bullish rip tide dominating sentiment in recent years.
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It is no surprise that investors are harking back to events leading up to the 2000 and 2008 market crashes. Trade tensions, growth worries and mounting financial uncertainties are bad enough, but the added threat of an all-out currency war could be the final nail in the coffin.

There is time to pull back from the brink, settle differences and let wounds heal. After all, the global economy has a great capacity for recovery, as the world showed in the wake of the 2008 crash. With the right kind of mutual commitment, the world can mend fences, trade flows should bounce back and global financial stability can find its footing again.

Except Washington and Beijing are so deeply at loggerheads, the chances of an early reconciliation look remote. What’s even more worrying is that the US election cycle could be impeding matters now, leaving investors to wait until 2020 for a peaceful accord.

It is a high-risk strategy if US President Donald Trump drags things out until the last moment to seal a deal with China, paving the way for a timely stock market revival and thus a second term in office. Given the fragile state of global confidence at the moment, market patience is running thin.

Leveraged bets could quickly unwind, with a market bloodbath following quite rapidly. The arguments for broad-based market liquidation are building with deepening signs of global stress apparent all around.

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