What Central Bankers Are Saying About the Trade War Threat

LAGOS (Capital Markets in Africa) – Central bankers are sounding the alarm on how the fledgling trade war could complicate their work by fanning inflation, undermining demand and unnerving investors.

With President Donald Trump readying to impose tariffs on China and also European automakers, monetary policymakers might be forced to decide whether to focus on supporting growth or fighting price pressures. A sell-off in equity markets would only add to their stress.

Here are extracts of some of the recent comments by central bank officials:

U.S.

• Federal Reserve Chairman Jerome Powell said in June that in principle, “changes in trade policy could cause us to have to question the outlook.” He added that “for the first time, we’re hearing about decisions to postpone investment, postpone hiring.”
• Atlanta Fed President Raphael Bostic, speaking in June said that “the more it progresses in this more contentious way, the more it pulls me to feel like the risks are on the downside for the broader economy.”
• Dallas Fed chief Robert Kaplan said in June “let’s fight what I think is actually a really big threat, which is the relationship with China. But I think we’d be much more potent in fighting that battle if we weren’t fighting five other battles with our friends.”

China

• People’s Bank of China Governor Yi Gang has argued that the world’s second-largest economy is less reliant on trade than before, as it faces off with the U.S. Trade dependency dropped from 64 percent in 2006 to 33 percent last year, lower than the world average of 42 percent, Yi said on June 19, after calling for calm from investors who had sold off earlier that day on concerns tariffs would harm growth.
• “With strong endogenous potential, the Chinese economy has sufficient means and space to cope with all forms of trade friction,” he said, adding the central bank will prepare policy tools in a forward-looking manner, use a combination of monetary policy tools, maintain liquidity at an appropriate and stable level.

Euro-Area

• European Central Bank President Mario Draghi flagged the “threat of increased global protectionism” as one of the factors adding to the uncertainty around the outlook. The ECB said in its latest economic bulletin that the risks could be “significant.”
• Protectionism “is having an effect on business sentiment, which might already be holding back investment,” Executive Board member Peter Praet said.
• Colleague Benoit Coeure stressed the ECB is “more concerned about the historical consequences over the long term” than about short-term effects.
• Global supply chains are “very fragile,” Governing Council member Ardo Hansson warned, risks are “big” right now. “The rhetoric that is being used now is actually a bit scary,” he said.

Japan

• Bank of Japan Governor Haruhiko Kuroda said on May 31 that dialogue was needed to make sure trade problems didn’t escalate, although he didn’t think there had been an impact on his nation’s economy. He cautioned that protectionist measures could backfire on those who took them, including in the form of retaliatory tariffs.
• More recently, on June 20, Kuroda showed deepening concern: “I really hope that this escalation could be rescinded, and a normal trading relationship between the U.S. and China would prevail,” he said. “This is a matter of great concern for Japan.”

Brazil

• No-one wins from a trade war, Brazil’s central bank president Ilan Goldfajn told Bloomberg TV in April. Goldfajn dismissed the suggestion that a trade spat between China and the U.S could work to Brazil’s advantage, given the strong commercial ties between the Latin American and Asian giants.
• “If you provide me with two options — benefiting from this conflict, or not having this conflict and continuing the benign global environment — I would prefer to continue having the benign global environment,” he said.
• Policymakers recently acknowledged the “growing risks to the continued expansion of global trade.” But their policy statement also highlighted the “Brazilian economy’s capacity to withstand a setback in the international scenario, given its robust balance of payments, low inflation environment, anchored expectations and prospects of economic recovery.”

Mexico

• Mexico increased borrowing costs for the second time this year on June 21 as trade tensions played a part in pushing down the peso, posing a risk to inflation.
• Mexico’s new central bank chief Alejandro Diaz de Leon told Reforma newspaper in June that the imposition of tariffs on Mexico’s steel and aluminum by the U.S. may generate a trade war which could put economic stability at risk. Mexico has an open economy, he added and uses foreign sector and exports to help support growth and job creation.

Canada

• Bank of Canada Governor Stephen Poloz said in June he expects to continue raising interest rates in spite of mounting trade tensions. “We’re data dependent, not headline dependent,” Poloz said.
• The central bank will try to estimate the impact of U.S. steel tariffs that have already been implemented, but for the rest, “we’re not going to make policy on the basis of political rhetoric or any of that,” he said.

Australia

• Reserve Bank of Australia Governor Philip Lowe said in June that he found talk of a trade war “incredibly disturbing.”
• “Can any of us think of a country that’s made itself wealthier and boosted productivity growth by building walls? Presumably not,” he said. “The tariffs themselves I don’t think are going to derail the global expansion but I can think of two mechanisms where that expansion could be derailed.”
• “Financial markets have taken a relatively kind and benign interpretation, but that could change very quickly and so we could see a lot of turbulence as people bring those future events forward to today. The other mechanism is businesses. The option value of waiting goes up a lot.”
• “It wouldn’t take that much for financial markets to kind of combine with businesses, who are waiting to turn this into a really big global event.”

U.K.

• In its policy statement on June 21, the Bank of England said a “major increase in protectionism worldwide could have a significant negative impact on global growth.”
• Governor Mark Carney said June 27 that the escalation of trade tensions is “concerning.”
• “The strict mechanical impact of tariffs being put in place, even some of those that have been discussed, is manageable,” he said. “But the question is the extent to which these measures start to affect business confidence. You have a negative effect for example on business investment. And to what extent is it possible for broader risk-off attitude or adjustment to risk appetite in financial markets. Those are possibilities.”

South Africa

• South African Reserve Bank Governor Lesetja Kganyago said in June that the Fed’s job is being complicated by U.S. trade and fiscal policy.
• “Nobody figured out that the U.S. could embark on all of these trade policies that they had embarked on and that complicates the work of the Fed,” he said in an interview. “I don’t think that they had factored in earlier that there will be a stimulus that had been put in for the U.S. economy from the fiscus.”
• The steps by the U.S. are a risk to financial stability, the Reserve Bank said in its annual report on June 25. “Rising prospects of trade protectionist measures by the U.S. and potential retaliatory measures by other jurisdictions could have negative implications for global asset prices and potentially result in a trade war, impacting global trade,” it said.

Switzerland

• The Swiss National Bank said in June that “the risks are more to the downside. Chief among them are political developments in certain countries as well as potential international tensions and protectionist tendencies. These heightened risks affect sentiment on the international financial markets.”
• President Thomas Jordan said in March that “if a spanner gets thrown in the works, then that’s bad for everyone. A drop in foreign demand would hurt the Swiss economy and weigh on inflation, he said. “Our monetary policy is very much affected by such developments.”

Israel

• Bank of Israel Governor Karnit Flug said Trump’s steel tariffs and reciprocal measures from China would have a limited impact on the Israeli economy but that the possibility of a full-blown trade war was “worrying” and small economies could be especially vulnerable.
• “I think if we go back from a free trade this is bad news for the global economy, and it’s certainly bad news for small, open economies such as Israel’s,” Flug told Bloomberg TV in a March interview. “We all benefit from free trade.”

Sweden

• Sweden’s central bank has been cautiously pessimistic about the impact of a trade dispute, with policymakers saying that a worsening situation would obviously hurt growth.
• In their latest monetary report from April, they said that their forecasts hadn’t been affected ‘to any great extent” but that the impact would be greater should the trade conflict spread and lead more countries to introduce trade barriers.

Norway

• Norwegian policy makers said in June that one of the main risks now is that global growth may be weaker than projected “in the light of rising protectionism.” They were still sanguine enough about the risk to cement a coming interest rate increase for September.

Indonesia

• Bank of Korea Governor Lee Ju-yeol, whose economy counts on exports for 43 percent of the gross domestic product, said his nation won’t be able to escape lightly from the impact of the trade conflict between China and the U.S.
• Some 25 percent of Korean exports, mostly components, go to China, and at least 10 percent of these goods then go into products that are shipped to the U.S. Lee, speaking on June 19, noted that the dollar has risen sharply against the won and that the bank also needs to closely watch how the impact of volatility in global financial markets plays out for Korea.

Source: Bloomberg Business News