The impetus of the optimistic discourse of the first quarter of 2018, emanating from the International Monetary Fund and the World Bank, has been confronted with the world economic reality, the foreseeable announcements of the raise in interest rates by the US Federal Reserve (Fed) and the risks associated with the unilateral increase of US tariffs.

In the IMF World Economic Outlook (WEO) in April, forecasts of world economic growth were maintained at the same 3.9% level presented in January. World Bank estimates continue positive for 2017 and 2018, although they have moderated their optimism in the medium term at 3% and 2.9%, for 2019 and 2020, respectively.

However, the tensions created by the US complicate the prosperous scenario of the world economy. Events such as the FED raise of interest rates; with the further announcement of two more hikes during 2018 (in September and December) and two more in 2019 (March and June); result in increases in the interest rates of the rest of the world; with an impact on the exchange rate; and the adverse impact on the rate of investment and consumption of the rest of the world . Additional to this are the increased geopolitical tensions provoked by US actions in the Middle East and the Caribbean; in North Korea; and its migration policy, which mean very high risks for the world economy. Along with the drop in investment and consumption comes the rise in the price of oil and the cost of labor. That for the world economy and for the important stock exchanges, carries a negative sign.

The first reactions to the schizophrenia of the USA have been: Europe normalized the monetary policy to finish with the "quick easing"; gradually, to achieve her inflation goals. In the face of changes in the FED's benchmark interest rate, Latin American Central Banks have had opposing reactions: Mexico, Argentina and Ecuador increased it, while Brazil, Peru and Colombia decreased it (see Table 1), but sooner or later it will force emerging countries to increase their respective rates.

The first reactions to US schizophrenia have been: Europe normalized their monetary policy, putting an end to “quick easing”, with a gradual process, to reach their inflation goals. Faced with variations in the base interest rate of the Fed, the Latin American Central Banks had contrary reactions: Mexico, Argentina and Ecuador increased them, while Brazil, Peru and Colombia lowered them (see table 1), but sooner or later the increases will oblige emerging countries to increase their respective rates.

The effects of the US protectionist policy are equally or more worrisome. NAFTA seems less likely to survive against the imposition of tariffs on steel and aluminum of 25% and 10%. Mexico, responded with tariffs on products such as flat steels and sausages; and threatened essential products such as soybeans and corn. Canada, the most affected by the measures, set out to impose tariffs on purchases of goods worth $ 12.8 billion. To make matters worse, the tension between the US and Canada grew after the meeting of the G-7 in Quebec, for the noxious statements of the economic adviser Peter Navarro. (see http://obela.org/analisis/el-final-de-la-era-multilateral).

Source: OBELA

The European Union responded with 25% taxes on consumer and agricultural products. To which the US has threatened to apply a second round of retaliation with a tariff of 20% on imports of cars from Europe. It has also threatened the imports of vehicles and auto parts from Mexico, Canada and Japan in an open scenario of trade war.

The relationship between China and the US is increasingly hostile. After the US Treasury Secretary, Steven Mnuchin, confirmed that the suspension of tariffs had been agreed between the two countries, they imposed additional tariffs of between 15% and 25% on more than 1,000 products from China, for $ 50,000 million dollars, related to medicines and technology. The Chinese retaliation was 25% on 659 agricultural products, among which soy, corn, rice, beef and pork stand out. To which the US reacted in a second round of increases with tariffs of $ 200,000 million dollars. The second Chinese retaliation has been to cancel the negotiations with the US, and assure that it will respond with proportional reprisals.

The policy of President Donald Trump’s Government does not seem to respond to the long-term needs of the US economy. The policies try to solve the US prolonged external deficit and economic stagnation with increases in the reference rate, until reaching 3.5% in 2019 or reaching 2020 with 4%. This will further affect international trade, and the dynamism of export trade with the effects on its already high levels of external indebtedness. It is causing depreciation in currencies with inherent volatility and contraction of their markets, as has already been seen in Brazil, Mexico and Argentina.

All this put together will lead to higher increases in interest rates in emerging economies, which will stagnate aggregate demand components and generate a slowdown in regional and global economic growth. The US is playing, alone and forcefully, to relocate itself as the leading country at the expense of everything and everyone. However, it is not facing its central problem: technological change and its lack of competitiveness. The US trade deficit is the result of this and it is not the fault of the rest of the world.

- Oscar Ugarteche is Senior Researcher IIEc-UNAM, Project Coordinator obela.org

- Armando Negrete is Academic Technician IIEc-UNAM, member of the OBELA project

- Priscila Lechuga is a member of the OBELA project.