What is the unknown and unpredictable parameter in the global economy today? More than anything, it is the tariffs and trade disputes.
The United States’ economy has always challenged the conventional thinking, and it is doing so again. The US economy grew at about 2 percent in 2017. In the first quarter of this year, the economy grew at 2.3 percent. The second quarter growth has been 4.1 percent. That is stunning. The unemployment rate is at a historical low – about 4.1 percent. The optimism index of the National Federation of Independent Business is in the 99th percentile. Steep tax cuts for corporations and other enterprises have heaped plump windfalls on many investors
and chief executives. After-tax corporate profits account for 9.6 percent of the nation’s total domestic output.
Sure, there are potential perils: unpredictable tariff battle, soaring deficits and budget disagreements. But the American economy has a way of battling these. Deficits and budget disagreements are not new – and it is not clear that they have hurt the economy. The strength and innovativeness of American economy is exemplary.
The unknown variable in the US economy is: Trade and tariff battles. What about the global economy? The forecasts the global growth in 2018 are about 3.5 percent. But the synchronized growth that the global economy saw through 2017 for the first time in a decade is dissipating. Why? Pressures over global trade. For instance, German exports plunged unexpectedly in February, posting their biggest monthly drop in more than two years. Or for instance, China and India retaliating by imposing new tariffs on US goods.
So, tariffs and trade disputes are the most challenging threat to the US and Global economy¹. How can we analyze, understand and describe the trade disputes? Prospect Theory and Loss Aversion provide a useful framework.