The world has always been challenged by the dynamics of geopolitics. The nature and magnitude of associated conflicts may transition and manifest across varying contexts. However, broadly speaking, geopolitical risks for the economy are ever present.
The fierce competition between the powerhouses of the East and West is being watched closely by many.
The trade war between the US and China is characterised by tit-for-tat tariffs. It continues to disrupt major global supply chains with greater levels of exposure to the two. It also threatens to hinder global economic growth, albeit the extent to which is difficult to determine.
Trade Wars – What are the Geopolitical Risks for the Economy
Numerous attempts to assess the impact and cost of the trade war between the US and China have been undertaken.
Recent research by the International Monetary Fund estimated the combined effect of the tariffs announced in 2018 and the recently announced tariffs this year could lower global GDP by 0.5% in 2020.
However, not all market participants are worse off as a result of the disputes between the US and China.
The impact of the trade war has affected the financial markets, primarily through its effect on investor sentiment. But more broadly – there could be opportunities for some nations to benefit from a potential diversion of trade. This is particularly the case for economies who have the competitive capacity to replace US and Chinese firms .
China’s Economical Goals
The open rivalry and strategic competition comes as China makes progress towards achieving its major long- term goal.
This is to become a “moderately prosperous country” by 2020.
As part of this strategy, China aims to become a “global innovation power in science and technology” along with several other goals relating to sustainability of its growth.
Some of the actions China is alleged to have taken to achieve this, including allegations of inappropriate transfer of IP and technology, have raised concerns over national security for the US.
This issue has been a driving force behind the protracted trade negotiations between the two countries. Negotiations have stalled on matters related to restrictions placed on some of China’s largest players in the tech industry. The tensions between the nations are likely to remain while the possibility of a trade deal is still unknown.
Recently the People’s Bank of China (PBoC) let the yuan depreciate in its daily rate fixing, to be above the key USD/CNY 7 mark. Key reasons for the RMB depreciation is suggested to be in support of growth in light of the impact of US tariffs on China.
Recent measures by China to combat US tariffs through a devalued yuan has soured the outlook for a trade deal.
Unrest in China
While China is caught in a challenging set of negotiations with the US, it is facing unrest within its own country.
In 1997, when the UK handed Hong Kong over to China, a One Country, Two Systems Framework was established. It set out civic freedoms and a high level of autonomy, including judicial independence.
Recently proposed amendments to Hong Kong’s Fugitives Bill to allow extradition of fugitives not only to China, but to any jurisdiction in the world with which the territory has no existing formal agreement, has led to protests in the streets of Hong Kong. There are concerns and fears that the law could be abused by China for political or commercial reasons.
What began as a peaceful protest has now turned into the revival of a deeper issue.
While it is an example of China’s assertion of power within its own borders, it too is a demonstration of a clash of political ideology and symbolic of the gradual reclaim of power that has long been vested in the West.
Uncertainty in the UK
Changing relationships is also clear in the pending UK exit from the European Union (EU). This poses more geopolitical risks for the economy.
The outcome remains more uncertain yet following the resignation of May only months before the Brexit deadline. Oxford Economics’ modelling of the economic implications assumes the base case as the UK continuing its EU membership.
In this model, all scenarios show a degree of trade destruction in which UK trade volumes decline as a share of GDP. This reflects the increased cost of trade between the regions, encouraging consumption of domestically produced goods instead.
In the worst case scenario, exports fall by as much as 8.8% and imports by up to 9.4%. The loss contributes to a 3.9% loss of GDP when factoring in events, such as a drop in labour productivity.
The rise of widespread geopolitical issues comes at a time when the world economy is slowing. The uncertain impact of potential US tariffs and the course of the UK’s pending divorce from the EU continues to introduce greater levels of volatility into the markets.
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