World Economy

Trade War May Usher In Financial Crisis Sooner

India is too poor to grow without exporting.
India is too poor to grow without exporting.

A trade war would bring forward the next financial crisis sooner than expected, according to the Societe Generale strategist Albert Edwards.

Edwards says his bearish thesis for the economy may be unfolding sooner than he expected. The Societe Generale global strategist has long warned about the threat of deflation, driven by countries like China devaluing their currencies to make exports more attractive. The end result would be a collapse comparable to the 2008 crash, he said, Business Insider reported.

Edwards now points to the Trump administration’s trade policy as another catalyst that could hasten the next crisis. Recent tariffs the US imposed on steel and aluminum imports threaten a full-scale trade war, he noted.

“A trade war and competitive currency devaluation was always going to be the end game in our Ice Age thesis as a global deflationary bust destroyed wealth, profits, and jobs,” Edwards said in a note on Thursday. “But it looks as if it might be arriving sooner than we had anticipated.”

China exports just 1.1% of its steel to the US, and so the tariffs were considered unlikely to do serious damage to Chinese businesses. The more immediate fuel for a trade war, Edwards said, is retaliatory action against China by the US for alleged intellectual property theft. The Nikkei Asian Review reported Wednesday that the US was set to impose tariffs on $60 billion worth of Chinese products as punishment.

The US could also turn on other trading partners as Trump continues to advance his “America First” agenda. “Boiling away in the background are Germany’s, and now too the eurozone’s, outsized trade surpluses” with the US, Edwards said. He added, “Expect Trump to soon turn his protectionist fire on both Germany and the EU. That will be messy.”

  Big Countries To Lose

One of the more mystifying features of recent economic debate is how many people seem unbothered by the very real possibility of an old-fashioned trade war. Trump, of course, relishes the possibility of such a battle—as he would, no doubt, any war he didn’t have to fight personally. Naturally, he’s convinced that the US would “win” one, Bloomberg reported.

Rarely is much to be gained from unpacking the US president’s thought processes. But others, too, are alarmingly sanguine about the effect that a major destabilization of trade would have on their nations or businesses.

Consider the Indian auto magnate Anand Mahindra, who recently tweeted he was “not sure why Indian markets seem so perturbed by the threat of global tariff wars.” Only smaller, export-focused countries stood to lose, he argued; “countries with large domestic economies can easily withstand tariff threats.” His conclusion: “India can stand tall in a trade war.”

Mahindra’s argument—because he does have an argument to make, unlike Trump—is worth looking at more closely. He’s a particularly thoughtful and influential business leader; many in the Indian government and business community appear to think similarly.

His point is that, even if tariff walls went up, India’s large market and relatively swift growth would force multinationals who wanted a piece of that growth to manufacture locally. Nor is Mahindra afraid that innovation and industrial development would stagnate as it did in earlier decades, when India walled itself off from the world. “India’s a free-market economy,” he argued, “and can access global technology and capital to fuel its own innovative startups.”

Now, this is a pretty seductive set of claims. If countries such as India could still benefit from global networks—importing innovation, cash and resources—without having to do the hard cost-cutting required to increase competitiveness, then sure, less trade sounds good. Too good to be true, in fact.

  Can India Prosper?

Would Indian workers benefit from higher tariffs? No, they wouldn’t. India’s not just any large economy: It’s 1.3 billion strong and growing. This is a vast internal market, yes. But it’s simply too poor to grow rich purely by focusing on domestic demand. The millions of unemployed young people in India don’t have the purchasing power to create jobs for each other. Like China, Japan, South Korea and dozens of other countries before it, India will have to export if it is to prosper.

Can India export entirely on its own terms, coddling domestic manufacturers while blocking imports? No, that’s not going to happen. On Wednesday, the US trade representative’s office announced that it was taking action against Indian export-promotion schemes—some of them recent, others longstanding—because India was now richer than the World Trade Organization’s ceiling for such programs to be acceptable.

The richer India becomes, the less the world will be willing to put up with one-sided trade policies. Everyone, including India, has already been burnt once this millennium by Asia’s other giant, China, which bent international trade rules much more cynically than India can or ever would.

Would Indian companies benefit? Well, Mahindra’s company itself might not. After all, it has just invested a great deal in Detroit, as he pointed out in a tweet directed at Trump. According to the Wall Street Journal, Trump’s new tariffs have increased uncertainty for Mahindra’s investment.

In fact, few big Indian companies would be happy operating just in India. Even for Indian capital, the sovereign risk is too hard to manage; everyone wants to be global. An India that retreats in on itself will be very bad news for Indian firms.

Unless forced by global competition, in the form of products allowed into the Indian market by low tariff barriers, they’re going to take things easy just as they did during India’s gray, socialist decades.

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