What are the risks of the ongoing trade war?

Key Concepts

• Tariffs: Taxes imposed on imported or exported goods, impacting global trade flows and economic growth.
• Trade Wars: Escalating tariff disputes between countries, leading to economic uncertainty and potential recessionary risks.
• Effective Tariff Rate: The actual average tariff applied to traded goods, often differing from announced rates due to trade adjustments and underreporting.
• Nearshoring/Reshoring: The practice of bringing production closer to home, driven by tariff costs and supply chain concerns.
• Trade Fragmentation: The breakdown of global trade integration, with countries favoring regional or bilateral trade agreements.
• Crowding Out Effect: Government borrowing leading to reduced private sector lending due to increased demand for bonds.
• Fiscal Deterioration: Worsening government financial position, often due to increased spending and reduced revenue.
• Countercyclical vs. Procyclical Fiscal Policy: Government spending that stabilizes the economy during downturns (countercyclical) versus spending that exacerbates economic cycles (procyclical).

Global Economic Impact of US Tariffs & Trade Uncertainties

The analysis from S&P Global estimates that US tariffs will cost global businesses up to $1.2 trillion in 2024. Approximately one-third of these costs will be borne by companies, while the remaining two-thirds will be passed on to consumers. This assessment forms the basis for understanding the widespread economic anxieties surrounding current trade policies.

The "Tariff Terror" & Initial Economic Shocks

Colombian economist Mauricio Via Mazar describes the initial reaction to escalating tariffs as a period of “tariff terror,” characterized by widespread scrambling and adjustment attempts by countries. In October of the previous year, the implementation of significant tariffs led to a substantial shaving off of global growth projections. Analysts even considered the possibility of a US recession, with the effective tariff rate reaching a historically high 24-25%, a level not seen in the past 100 years.

Evolution of Tariff Rates & Trade Adjustments

While the initial effective tariff rate was alarmingly high, it has since decreased. Via Mazar attributes this decline to two primary factors: the constant escalation and de-escalation of tariffs, creating a volatile environment, and the underreporting of trade activity, suggesting that goods are being traded below the officially imposed tariff levels. The current effective tariff rate is estimated to be around 10%, still historically high but significantly lower than the peak. This has alleviated some recessionary fears, though concerns remain.

Academic Opposition to Protectionist Measures

Via Mazar, representing the broader academic community, expresses strong opposition to protectionist measures like tariffs. He argues that they undermine established trade benefits and lead to negative consequences such as trade fragmentation, nearshoring, the substitution of cheaper imports with more expensive alternatives, and limitations on exports. He states, “as most of the academic world we would be sort of against these…protectionist measures because it really blows away several of the trade benefits that we have receiving.”

Colombia's Paradoxical Position

Colombia presents a unique case study. While coffee exports are subject to a 10% tariff, its competitors – Brazil and Ethiopia – face higher rates. This has, paradoxically, increased Colombia’s relative competitiveness in the US market. However, Via Mazar emphasizes that even in this specific instance, the overall negative consequences of tariffs are recognized.

Central Banking & the Appeal of Public Service

Via Mazar explains his continued commitment to public service at the Banko de la Republica (Colombia’s central bank). He highlights the unique environment central banking offers, combining elements of academia, the private sector, and the public sector. He values the opportunity to conduct research, contribute to policy-making, and experience a blend of perspectives not typically found in the private sector. He notes that central banks offer a “very special place” that he appreciates.

Long-Term Historical Perspective on Trade Wars

When asked to consider the historical context of the current trade situation, Via Mazar emphasizes the difficulty of fully understanding events while living through them. He predicts that if the effective tariff rate falls below 5%, the period will be viewed as a minor bump in the road. However, if tariffs worsen, it could mark a turning point towards significant commercial fragmentation and a reshaping of global trade relationships.

Global Governance & Multilateral Institutions

Via Mazar acknowledges the criticisms leveled against institutions like the UN, IMF, and World Bank, recognizing the need for reform. He points to the abrupt shutdown of USAID programs in Colombia as an example of the negative impact of US policy changes on multilateral initiatives. He stresses the importance of governments taking the lead in development projects, creating a “buffer zone” to mitigate the impact of funding reductions from international organizations.

Climate Finance & Sustainable Growth

Discussions around the IMF and World Bank highlighted the emerging importance of climate finance and sustainable growth. Via Mazar notes that these initiatives are still in their early stages, requiring significant investment and coordination. He emphasizes that monetary policy is not the appropriate tool for addressing these challenges, placing the responsibility on fiscal and executive branches of governments.

Fiscal Concerns & the Risk of Debt Accumulation

A significant concern raised is the growing fiscal deterioration globally, particularly in the US. Via Mazar points out that US tax cuts have far outpaced spending cuts, leading to a substantial increase in the national debt – potentially rising from 115% to over 140% of GDP within five years. This trend is alarming because it can lead to a “crowding out effect,” reducing private sector lending and hindering economic growth. He also warns of the potential for the US to “export inflation” to other countries.

The US Debt Cycle & Historical Amnesia

Via Mazar draws a parallel to the Great Depression, suggesting a tendency for the US to forget past economic lessons. The current pattern of “tax cut and spend” is unsustainable and poses a significant risk to the global economy. He notes that the US can export inflation and that increased government debt can stifle private sector lending.

The Emotional Toll of Global Economic Monitoring

Via Mazar concludes by describing the emotional impact of attending international economic forums. He admits to leaving these meetings feeling more concerned than when he arrived, as exposure to a broader range of global risks heightens his awareness of potential vulnerabilities. He states, “you always leave a little bit more concerned than when you arrived.”

Conclusion

The interview with Mauricio Via Mazar paints a complex picture of the global economic landscape, heavily influenced by US tariff policies and broader trade uncertainties. While the initial shock of high tariffs has subsided somewhat, significant risks remain, particularly concerning fiscal sustainability and the potential for long-term trade fragmentation. The need for international cooperation, responsible fiscal policies, and a renewed commitment to multilateral institutions is paramount to navigating these challenges and avoiding a more severe economic downturn. The interview underscores the interconnectedness of the global economy and the importance of learning from past mistakes to ensure a more stable and prosperous future.