Former RBI governor Raghuram Rajan has cautioned that the ongoing trade wars along with a build-up in leverage and high asset prices could result in a toxic mix that would be a drag on a global growth. Speaking in a television interview, he said, “We are very well aware that two things have built up - which had built up before the previous crisis- leverage and asset prices. Trade is an issue for the world to be concerned about. It is extremely important that we have good outcomes here. By all means negotiate, but don't pull the nuclear trigger here.”
He said that although global growth had been strong in recent years, the big question is how long it can continue and whether it justifies elevated asset prices. He added that moves by the US or China on trade tariffs threaten growth at a time when underlying conditions are fragile, and some emerging market nations are highly levered. Hopes soared on the trade wars front when China and the US met for face-to-face discussions aimed at defusing the spiralling tension last week. However, the Chinese delegation left Washington without any breakthrough. Reports said the US immediately imposed a second wave of tariffs on Chinese goods worth $16 billion and China was quick to retaliate with retaliatory taxes on the same value of US products.
The Donald Trump Administration threatens a third round of tariffs on an additional $200 billion of Chinese goods, which could come as soon as next month. Meanwhile, Rajan on the topic of the Turkish crisis said, “My sense is that it is not a systemic issue yet among emerging markets.” He added that tariffs on China have potential ripple effects for other emerging market nations, many of whom are dependent on trade and export directly or indirectly through China.
For emerging market countries like India and Brazil headed for elections, he recommends they focus on maintaining macroeconomic stability. Rajan does not see the rupee's recent fall as “too worrying”, explaining that it is “dollar strength.”
