As is evident by the past six days of slumps in the stock market, the economy of the United States is globalized. Changes in the markets of countries around the world have profound impacts on the economy of the United States — and vice versa.
Last week, when China’s economy took a turn for the worse, U.S. stock markets felt the pain in a big way. As it devalued its currency, the second largest economy in the world took a huge hit that resonated around the globe. Faced with the stock market chaos that comes with international economic strain, the U.S. will have to do all that it can to approach the situation diplomatically and, most importantly, avoid a trade war.
Trade wars can be devastating to the world economy. When one country imposes tariffs on another, the country upon which the tariff is imposed may respond in turn by creating a tax of their own, thereby instigating a trade war. Pressure from domestic companies can often force governments into tariffs but trade wars can also begin as an effort to boost a country’s own economy. Of course, when the two largest economies in the world are at play, the stakes are much higher.
The negative impacts of a trade war are fairly obvious. It is a well-known principle in economics that efficient trading benefits both parties involved. Larger economies can better handle trade wars than can smaller countries, but should the economy of either China or the U.S. suffer, the rest of the world will feel the burden as well.
Fortunately, as U.S. stock indices began to climb upwards on Wednesday, a trade war seems like a less likely result. But the tumultuous week preceding the staggering increase yesterday cannot be ignored. With America trying to protect itself and China scrambling to avoid a monumental backslide; diplomacy has a tendency to fall to the back burner. The recent events in China have even sparked political aggression amongst several presidential candidates — claiming too great of a dependence on China. This cannot be the case.
According to the AP, Wednesday’s 600-plus point climb in the Dow was the third-largest in its history. With volatility that produces swings this large in six short days, it’s understandably easy for governments and citizens, including politicians, to be concerned by major fiscal policy decisions around the world.
According to Forbes, there has been a slowdown in global trade over the past few years, despite increasing globalization. With such a slowdown, economic failures seem more likely. In such a scenario, perhaps one of the biggest things that can prevent this economic downturn from spiraling out of control is trust in international and domestic markets. If the U.S. continues trade with China and vice versa, the two largest economies should be able to avoid economic melt down, at least to some extent.
The natural response to difficult economic times around the world that cause problems back home is to separate from those problems by limiting international connections. Yet, as proven by yesterday’s rebound, maintaining confidence and diplomacy may prove to be the best response to global economic issues.