Turmoil and trade wars dominate ‘summer Davos’

Oil prices have hit their lowest in two weeks after Israel agreed to US President Donald Trump’s proposal for a ceasefire with Iran.

But business leaders at a key economic meeting in the northern Chinese port city of Tianjin find themselves troubled by the state of the global economy, and the prospect for meaningful growth.

The rapid escalation of the conflict between Iran and Israel – which has now pulled in the United States – temporarily replaced trade, tariffs and inflation at the top of a long list of concerns with far-reaching consequences.

“It is the most complex geopolitical and geo-economic backdrop we’ve seen in decades,” Borge Brende, president and chief executive of the World Economic Forum (WEF), said ahead of the summit, dubbed the “Summer Davos”.

“If we are not able to revive growth again, we can unfortunately see a decade of lower growth.”

WEF has long been a symbol of the merits of free trade and a globalised world – but Trump’s tariff wars have upended supply chains and the ability of businesses to plan for the future.

“We live in an environment of radical uncertainty,” says Jeffry Frieden, professor of international and public affairs and political science at Columbia University.

“Businesses have to figure out what has happened over the past several years as we come to the end of an era, in my view, of international economic and political affairs and move into a new era.”

Geopolitical risks have significant implications for the global economy.

Higher oil prices can push up the operational costs of energy for goods producers – and at some point, those additional costs may be passed onto the consumer.

People may in turn hold back on spending, as increased prices dampen demand. If inflation remains high, central banks will be reluctant to bring down interest rates.

Geopolitical tensions can also lead to losses as the result of other factors, such as the rerouting of flights and disruption to tourism activities.

Investors can get rattled by uncertainty, leading to sell-offs on the market and a rush for safe haven assets like gold and the US dollar.

Iran’s threat to close the Strait of Hormuz – one of the world’s most critical transit routes, through which roughly a quarter of the world’s global oil supply passes – would leave China especially vulnerable. It is estimated that Beijing imports 90% of the oil Iran sells.

Chris Torrens, head of China at advisory and advocacy firm APCO, points out that some of the country’s bigger machinery sectors, including the new high technology industries that Beijing is trying to support, still rely on oil.

“So anything that disrupts that oil supply is going to be a worry to Beijing,” he says.

The WEF event comes at a critical moment for China’s economy, which has for years struggled from a protracted property crisis, high unemployment and sluggish domestic spending.

Beijing has unveiled a string of measures to try to stimulate the economy.

Until now, China is still achieving its official growth target of around 5%, and economists say the country could account for almost 30% of global growth this year.

Mr Torrens says Chinese officials detect an opportunity, and suggests that in a sense the country is opening its doors through the WEF event.

“I think the US is giving China a massive PR opportunity to portray itself as a champion of globalisation,” he says. “To say that China is a bastion of free trade is still a work in progress, because there are still market access issues. But China is certainly keen to play its part and step up as a regional and a global player.”

With Trump’s trade war now threatening exports from the manufacturing powerhouse, Beijing is looking to emerging technologies like Artificial Intelligence (AI) as potential sources of growth.

“Trade has been an important engine of growth for the last decade or two, but it’s clear that certain technologies have a huge potential to help us with new sources of growth and competitiveness,” said Mirek Dusek, managing director at WEF.

Accounting firm PwC says AI could boost global growth by 15% by 2035.

At the WEF event, though, tariffs are never far from the minds of business leaders, as they try to make alliances and navigate an uncertain economic environment.

In the coming weeks, Trump’s pauses on his hefty reciprocal levies are due to expire. And there’s little certainty as to how the global business landscape might look after that.

“It’s very difficult for businesses to make long term plans,” Mr Frieden explains. “If you don’t know what the level of tariffs on your goods are, you can ‘t figure out if it makes sense to relocate in the US or keep your activities overseas – whether you’re an American corporation, or a non-American corporation.”