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How Geopolitical Uncertainty Is Reshaping Global Financial Stability

Daniel Kim Views  

Newsis

Global macroeconomic experts have warned that financial market instability could increase due to geopolitical unrest caused by U.S.-China trade conflicts, and ongoing climate crisis.

At the keynote speech of the Seoul International Finance Conference hosted by the World Economy Research Institute and Shinhan Bank at Lotte Hotel in Seoul on the 28th, Stanford University Professor Anne Krueger pointed out that geopolitical conflicts could lead to a global economic crisis. Krueger served as the deputy director of the International Monetary Fund (IMF) and the World Bank. Michael Spence, a Stanford professor and 2001 Nobel laureate in economics, who also delivered a keynote speech, predicted that “macroeconomic uncertainty will increase over the next decade.”

Trade-Dependent Korea More Vulnerable

Krueger identified the following six issues:

  1. U.S.-China trade conflict
  2. Russia-Ukraine war
  3. Israel-Hamas war
  4. Weakening (or abandonment) of U.S. global leadership
  5. Response to the climate crisis (strengthening measures to mitigate climate crisis)
  6. Post-COVID macroeconomics.

She stated, “Policymakers will lose sleep over these issues.”

She explained that the U.S.-China trade war, which started seven years ago during former President Trump’s term, is a significant issue in itself as U.S. sanctions against China have slowed down the global economy. She urged for an acknowledgment that China and the U.S. are highly interdependent when it comes to trade,” warning, “Military intervention would be a disaster for both countries and the world.”

In particular, Krueger analyzed that although the tension between the U.S. and China is a global concern, Korea is more vulnerable. This is largely due to its export-driven economy and high dependence on trade with China.

She said, “All six factors mean that there is a considerable level of uncertainty in our future,” adding, “These factors can interact, so the impact of uncertainty can increase, and from Korea’s perspective, the U.S.-China trade conflict, WTO, and the trajectory of the future post-COVID macro economy will be the most important factors.” She advised Korea to hasten the transition to clean energy sources as the importance of energy security is increasing due to the Russia-Ukraine war.

Krueger praised Korea as a country with an excellent labor force and infrastructure. She predicted that the well-maintained commercial law and institutional framework protecting property rights could serve as a backdrop for becoming a global financial hub.

Global Economic Transition Increasing Political Uncertainty

Spence diagnosed that the current global economy is at a turning point, with populism increasing macroeconomic uncertainty.

He said, “The current global economy is at a turning point, and at a major transition that I have not seen in my 50 years of research.”

“Regardless of the cause, we can all agree that macroeconomic uncertainty will increase over the next decade without a doubt.”

He explained, “President Biden is the most protectionist president in over 100 years of history. He not only maintained all of Trump’s tariff policies but also proposed a very protectionist inflation reduction act (IRA).” He said, “Trump said he would impose high tariffs on friendly countries and introduce higher tariffs on hostile countries if he returns as president. This is an inevitable reality. I don’t want to exaggerate, but it’s definitely one of the many factors causing uncertainty.”

Regarding the timing of the Federal Reserve’s interest rate cut, Spence said, “People wonder when the Fed will cut interest rates, once or twice, but that’s not important,” adding, “We need to look a few moves ahead.”

He diagnosed that the current interest rate situation looks very similar to the “old normal” where high interest rates persisted. Spence further explained, “Political pressure is being applied to central banks in each country, and pressure to raise interest rates is coming from the populist camp. High interest rates will be prolonged further due to the green transition in the expansion of defense spending and the increase in national debt”

He added, “The Chinese economy is in trouble due to an oversupply of infrastructure and real estate,” adding, “Although it is not a nationwide phenomenon, this issue is observed in many areas that are key drivers of the Chinese economy.”

Daniel Kim
content@viewusglobal.com

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