But Asian economies are in a relatively stronger position to absorb these financial shocks. Economic fundamentals in Emerging Asian economies are stronger since the taper tantrum in 2013. 2 / 11  BIS central bankers' speeches  Foreign reserves and bank capital buffers are larger while financial regulatory frameworks are more robust. And policymakers in Asia are more prepared to make macro-policy adjustments as needed, including pre-emptive interest rate hikes to support exchange rate stability. The second risk to the global economy is rising protectionism. Protectionism is rearing its ugly head on three trade fronts: US-China; US-EU; and USMexico-Canada. Thus far, the US has imposed tariffs on solar panels, washing machines, steel and aluminum imports from all major trading partners. It has announced tariffs of 25% on $ billion of imports from China, and has threatened tariffs of 10% on another $ billion of imports from China. Both China and Europe have announced retaliatory tariffs. The immediate effect of these trade restrictions is limited and does not threaten global growth … yet. The announced tariffs are estimated to shave around 0.1% point off China’s growth, with the US economy similarly impacted by China’s retaliatory measures. The real risks from the tariffs are spillover effects, escalation, and economic uncertainty —all of which could severely undermine global growth. First, spillover effects. The impact of the tariffs will be felt not only in the countries involved but across the value chains that span several countries. Second, escalation.
This is unlike various financial crises in the past 25 years or so – which tended to have certain recurring themes, and which tended to begin in emerging economies before their knock-on impact was felt internationally. The analytical tools and policy prescriptions for dealing with such crises became more tried and tested over time, even if applied in too dogmatic a fashion at times. Global institutions, whether it was the IMF, developed nations, or a consortium of strong international banks, had the wherewithal to bring sufficient resources to bear on the problem. Crisis resolution was never easy but did not quite look insurmountable. Not so this time. The epicenter of this crisis is the US – it is the world’s largest economy, holder of the international reserve currency, and home to the largest and most sophisticated financial system. So we are talking about the core of the global financial and economic system where severe problems arose and have since spread across borders. In the US, the “shadow” banking system grew rapidly but was quite opaque in the way it operated. Before long, problems built up and spread to engulf the “traditional” banking sector. Within a short time, commercial banking operations were severely impaired. Right now, we are dealing with the bursting of multiple, overlapping bubbles – the housing bubble, the household credit bubble and the consumption bubble. Cutting across all three bubbles was leverage – households overstretched themselves; the financial institutions which were extending this credit to households were themselves taking on excessive leverage.