- The Bank for International Settlements has raised its concerns about ongoing trade wars and protectionist measures among major economies.
- BIS general manager Agustin Carstens said globalised economies – including the US – are ill-equipped to prosper if trade links are cut off.
- Carstens added that protectionist measures could set off a negative chain reaction sparked by higher price inflation.
The “bank for central bankers” has spoken, and its position is crystal clear: trade wars are not good — for anyone.
Such a view is likely to incite the protestations of US President Trump. However, the Bank for International Settlements (BIS) said there’s a risk trade protectionism could spark a negative chain reaction which gives rise to a “perfect storm” on global markets.
The BIS is co-owned by 60 central banks around the world, and was set up with the aim of fostering global financial stability. As such, it’s sometimes referred to as the “bank for central bankers”.
And its general manager, Agustín Carstens, outlined his concerns in a speech on Friday night called “Global market structures and the high price of protectionism”.
Carstens’ speech was centred around inflation; specifically, how trade protectionism drives up the input costs for finished products, leading to higher price inflation.
Inflation growth — or rather the lack of it — has been a key talking point for global markets in recent years.
But in an economic context, inflation is a tricky thing to manage. You don’t want it growing too slowly or too fast — but rather kept within a target range.
And Carstens highlighted how global trade has helped reduce the cost of goods in global supply chains. That’s helped to drive down the cost of finished products, which in turn keeps inflation in check.
How important is an interconnected supply chain to the global economy?
For one thing, Carstens said global trade in intermediate goods & services — think of the separate vehicle parts used to build a car — now doubles that of final goods & services.
The difference is highlighted in the chart below:
Carstens said the globalised supply chain had helped to “put downward pressure on firms’ production costs and market power, keeping in check both prices and, ultimately, aggregate inflation”.
However, “seeking to turn back the clock and to retreat to a simpler world of local production may undermine the market discipline that helped curb inflation,” Carstens said.
As a practical example of how that can happen, Carstens pointed to the surge in US steel prices after the Trump administration announced tariffs against China in June:
“Since steel remains a key input for construction and manufacturing, these increases will feed into prices,” Carstens said.
In addition, industries linked to a global supply chain can’t just switch to domestic products instead of imported goods at the drop of a hat.
When mapping out the consequences, Carstens presented an ugly chain reaction. He said higher input costs could give way to higher price inflation, thus forcing the US central bank to raise rates faster.
That in turn puts upward pressure on the US dollar, sparking contagion risks in emerging market economies which raise a lot of their debt funding in USD.
Such wobbles have already been evident in recent weeks as the greenback strengthened.
“Today, we must recognise the potential for real and financial risks to interact, to intensify and to amplify each other,” Carstens said.
“Protectionism could set off a succession of negative consequences. If all the elements were to combine, we could face a perfect storm.”
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