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For Professional Clients and, in Switzerland, for Qualified Investors only. In Israel for Sophisticated Investors only.
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© 2019. BNY Mellon Investment Management International Limited. All rights reserved.
IDEAS AND KNOWLEDGE TO INSPIRE YOUR INVESTMENTS THINKING
31 October 2019

The fear factor?

De-globalisation is an ugly, scary word, meaning 40 years of ever-closer integration across borders may be going into reverse. The prospect of that looming spectre frightens many people. Take Kristalina Georgieva for instance. The new head of the IMF has suggested trade wars could wipe about US$700 billion off global GDP by 2020*.

 

The argument goes like this. Globalisation delivered lots of positives and, arguably, the entry of China into the world trading system in 2001 led to the greatest ever increase in human welfare. If such gains were driven by globalisation, then won’t a reversal imply a big backwards step?

 

While there is certainly a lot of fear around – just look at how markets move with every twist and turn of US/China trade or Brexit negotiations – maybe Halloween is a good time to remind ourselves that spectres don’t actually exist.

 

Maybe what’s already been achieved isn’t easily reversed, even if trade and capital flows end up a bit less frictionless than they were. After all, remember the 1950s and 60s – when celebrating Halloween really took off in the US. They were prosperous years, even though cross-border flows of goods and capital were a fraction of what they are now.

 

And, getting back to Georgieva’s numbers, US-China bilateral trade amounts to around US$700 billion. Even if both sides were to slap 25% tariffs on each other, that would amount to around US$170 billion, which is just 1% of global trade**. To get from there to a US$700 billion worldwide output loss you need to assume very high trade ‘elasticities’ and ‘multipliers’, or else something else is going on. That something else might just be fear – the fear of something bad happening whether or not it actually does come to pass.

 

Shamik Dhar, chief economist, BNY Mellon Investment Management.

 

*Guardian. Nations must unite to halt global economic slowdown, says new IMF head. 08 October 2019.

** Office of the United States Trade Representative. October 2019.

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