Global Risk Review Part III: The Risk of a Global Trade War

We have carried out a systematic review of global risk sources using our five-step structured risk assessment approach. Part one and two of the review published earlier covered the inflationary risk concerns and the risk of accumulating government debt. In this part three of the review, we focus on the risk of global trade war.


The Covid-induced disruptions to supply chains and the ensuing inflationary episode have been at the forefront of the public attention lately. It is very likely that the concerted effort of the governments, logistics and transport businesses and manufacturers will eventually succeed in removing the bottlenecks. However, the noise created by this temporary “technical” challenge masks a potentially bigger and more structural challenge – the risk of a reversal of globalisation and acceleration in trade barriers.
On the surface, specific trade-related “quarrels” between various nations may appear to be episodic and related to very particular political issues between two countries. However, the totality of many such episodes combined suggests that the world is on the way to more isolationism due to the absence of a strong and concerted global support for free trade. In other words, just like democracy, free trade requires constant effort of activist countries to be sustained – effort that has been mostly absent after the great financial crisis.

The practical implications of de-globalisation are sharply lower asset prices for countries and regions with smaller internal markets and greater dependence on global trade. European equities, for instance, will suffer more than equities in the US. Another likely outcome is a substantial negative impact on pension fund balance sheets. Based on the assessment of Mira ABM*, a typical pension fund is likely to experience a drop in the funding ratio of more than 30 points, which makes this by far the most impactful stress scenario currently included in our framework.

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