As the G-20 Approaches, Policy Uncertainty Weighs on Emerging Markets

In my view, a trade war between the US and China is the key risk to the global economy. In a world of integrated supply chains and connected financial markets, its impact is bound to spill beyond their borders and affect the global economy. All eyes are now turned to the June 28 G-20 summit, where the two countries’ presidents are expected to meet. What could this all mean for emerging market (EM) growth and central bank policy? I explore this question below.

Will the G-20 summit bring a truce?

US-China trade tensions have intensified since May, although they have been a concern for investors since early 2018 when the US announced the first tariffs on Chinese imports. In the interim period, we have gone from a tit-for-tat escalation of tariffs to intense engagement and expectations of an imminent deal, and most recently, to a breakdown in talks and further escalation (see table below). We will soon find out if there is light at the end of this tunnel or we are at the brink of an outright trade war.

Recent rhetoric suggests a hardening of positions on both sides. Hence, I do not expect trade tensions to be completely resolved at the G-20 meeting between US President Donald Trump and Chinese President Xi Jinping. Nonetheless, another truce may materialize, avoiding further escalation of tariffs and various other non-tariff barriers, and resumption of talks that could lead to an eventual deal later in 2019 or early 2020.

Then there is the question of the form that such a deal may take. The trade dispute between the US and China is now broader than tariffs and has been extended to security and technology issues.1 Even if a trade deal could be reached to save the day, we think the strategic competition between the two countries will be one of the defining themes for the next few decades at least, with repercussions for the global economy and emerging markets. In the medium-to-long term, this could generate losers and winners in certain situations as countries change trading partners and supply chains adjust to the new geopolitics.2 Nonetheless, I believe everyone would eventually lose overall as global growth prospects decline in an environment of protracted geopolitical tensions and de-globalization of production chains.