Foreseer of financial crisis Raghuram Rajan warns of toxic mix on trade

Raghuram G Rajan, who warned of a credit crisis in 2005 before it hit, is now cautioning that trade wars, when combined with a build-up in leverage and high asset prices, could result in a toxic mix that dragged global growth.

“We are all very well aware that two things have built up, which had built up before the previous crisis, leverage and asset prices,” Rajan, a former governor of the Reserve Bank of India, said in a Bloomberg Television interview Thursday. “Trade is an issue for the world to be concerned about. It is extremely important that we have good outcomes there. By all means, negotiate, but don’t pull the nuclear trigger there.”

While global growth has been strong in recent years, the concern is how long can it continue, and whether elevated asset prices are justified on the basis of it, Rajan said at Jackson Hole, Wyoming, the same place where he warned of credit risks in 2005. Moves by the U.S. or China on trade threaten that growth at a time when underlying conditions are fragile, and some emerging market nations are highly levered, he said.

Trade war on 'hold', but tariffs will be back if China breaks promises: US

The Trump administration won’t impose tariffs on Chinese products for now, after the two nations made progress on trade issues during two days of talks, Treasury Secretary Steven Mnuchin said.

“We’re putting the trade war on hold. So right now, we have agreed to put the tariffs on hold while we try to execute the framework,” Mnuchin said on “Fox News Sunday.”

President Donald Trump has threatened to impose tariffs on as much as $150 billion in Chinese imports to punish Beijing for allegedly violating American intellectual property and unfair trade practices. China vowed to retaliate with tariffs on everything from soybeans to airplanes.

Mnuchin’s remarks will be a relief to investors, who had feared the world’s two biggest economies were on the brink of an all-out trade conflict. The International Monetary Fund has warned that a global trade war would undermine the broadest global upswing in years.

Apple shows why Trump's threat to sever China trade over Korea rings hollow

President Donald Trump tweeted on September 3 that the US “is considering, in addition to other options, stopping all trade with any country doing business with North Korea” after it performed a nuclear test.

Though North Korea currently trades with nearly 100 countries, this threat was almost certainly aimed at China, by far its biggest trading partner.

And it is technically something that a US president can do. Under the International Emergency Economic Powers Act of 1977, the president can impose trade restrictions in the face of an “unusual and extraordinary threat.”

Nevertheless, it is an empty threat. In the same way that North Korean leader Kim Jung Un is unlikely to commit political (and national) suicide by following through on a war with the US , Trump is unlikely to commit political suicide by following through on this hyperbolic threat.

This is because the damage to the US economy, the global economy and international relations due to a cessation of US -Chinese trade would be catastrophic, so much so that it is nearly impossible to predict exactly how it would play out.

Some have tried to do this anyway, such as by citing the value of American trade with China, which was about US$650 billion in 2016, or around 4 percent of US GDP. Some simple thought experiments illustrate why this barely scratches the surface of the impact.
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