CAPSTONE PROJECT

Presentation
TRADE WAR, POLITICS AND HISTORICAL DATA; AN APOCALYPSE FOR
SMALL ECONOMIES AND RAPID BOOM FOR WORLD POWER

By
Akinola OGUNYEMI

A project submitted to WorldQuant University, USA.

In partial fulfillment of the requirements for the degree of

Master of Science

In
Financial Engineering
August, 2019.

Supervisors:
Prof. Tiberiu Stoica
Prof. Ritabrata Bhattacharyya
 Introduction
▪ Brief history of trade war; trade conflicts could be traced as far back as the
beginning of time from land expansion era to territorialism of the nature of
human around 14th century.
▪ Analogy of Trade War; trade war can impact emerging and or developed
economies, and even impair the global trading system with or without
bringing gains for anyone involved.
▪ Description of trade war; According to the definition from Wikipedia "trade
war is an economic conflict resulting from extreme protectionism in which
states raise or create tariffs or other trade barriers against each other in
response to trade barriers created by the other party.
▪ The main focus of this study is to investigate and assess the impact of
trade war using U.S. China and Iraq as case study and as well as the global
growth to justify the impact on macro economies (GDP, Export, Import etc.).
▪ Quantitative approach is employed in this research where data were sources
from reliable databases (World Bank, IMF, CPB world trade monitor etc.).
▪ Program used in the project were designed in python, R-package and as
well as using Microsoft Excel visual output to make clear findings.
 Problem Statement
Following research objectives facilitate the achievement of this aim:
Identifying factors impacting trade war, conflicts and political dynamism that cause
protectionism by using specific countries/markets to study.
Analyzing historical data in order to pin-point the magnitude of trade conflicts on an
economy.
Analyzing the impact of trade conflicts on an economy’s overall performance
Analyzing impacts of trade conflicts on overall implication to the world economy.
Identifying a constructive, creative, collaborative approach to trade conflict.
Providing recommendations to users of information in terms of increasing the
awareness of people on trade conflict.

Limitations
To mention great challenges or impediments been faced during this research
work is availability of crucial and current data, direction to approach project,
false macro data from the involved countries etc. In order to know what and
how trade war begins, history and data are the most important tool to justify
that.
 Literature Review
• Kutlina-Dimitrova and Lakatos (2017) discussed in their examination of the
wide-ranging costs of potential increases in worldwide barriers to bound tariff rates
and estimate that these could translate into an annual decline of global trade of 9
percent more than what was experienced during the global financial crisis of
2008-09.

• How trade war ignites; it is much obvious in this perspective; economies that
benefits mutually in trade activities or trades bilaterally tend to create conflicts that
could lead to trade war.

• According to what Bloomberg has said in one of their article that "there are no
doubt Trump administration's tariffs on a range of products from China and more
specific targets such as steel and washing machines, information technology gadgets
have contributed to investment in many protected sectors".

• Dynamism Impact of Trade War on GDP; inclusion of frictions in different markets

(financial, labour or goods markets) and the presence of internal policy responses
(monetary and fiscal policy). Economists say expansion or GDP in the case of this
research could slow by up to 1 percentage point in a tariffs battle but if the conflict
persists the magnitude of the loss might not be measurable.
 Methodology
• Economic situations were checked using quantitative research methodology by
examining the GDP, exports, imports and employment rate from historical data of
USA, China and Iraq.
• In order to get my fact straight, side-to-side comparisons was carried out on the
current GDP of the 3 countries so as to point out increase or decrease value
and/or percentage of Gross Domestic Products of the world power to the
developing nations impacted.
• One of the agregate measurement used is Purchase Managers index (PMI)
reading above 50 indicates that the manufacturing economy is generally
expanding, whereas a PMI reading below 50 indicates that it is generally
contracting.
• It is well known that certain emerging economies and even some sectors in
developed economies provide false macro data and this is therefore crucial
reason for using IMF and World Bank data source so as to achieve more reliable
and stable data.
• The indicators were analyzed and correlation, cointegration and Chow test
approach mostly from the year 1990 to Q1 2019 was used.
• The supporting programs and systems of this research were developed using
Jupyter Notebook in python 3.6, R 3.5.2 and Microsoft Excel.
 Results and Discussion
From the CPB world trade monitor, it describes that the volume of world trade
increased 0.5% in March 2019, having decreased 1.1% in February (initial estimate
-1.7%) which was when US imposition of tariffs on China products, and growth in first
quarter of 2019 was -0.3% compared to -0.6% in fourth quarter of 2018.

Implication of trade war will be summarized to be that once there is protectionism

from country A by raising tariff on country B, and certainly there is response in form of
retaliation from country B back to country A; reasons include retaliatory tariffs, quotas,
embargoes and other trade prohibitions.
 Results and Discussion
Results
• As the tariff war lingers further, more data were taken and
reports from IMF states “Global trade expanded by just 0.5%
in the first quarter of 2019, marking the slowest year-on-year
pace of growth since 2012.
•Around 2008-2009 during the 2008 'Great recession' that causes
sudden steep, trade suffers there was a drop down of the world
growth.
•It is evident that GDP is greatly slope downward.
• Iraq had a great pick of 81.8 real GDP around 2002-2003 but
its dropped to lowest -1.7 around 2017.
• China with 6.3 and U.S. with 2.3. Due to the trade war, the
world is in disarray.
• Iraq seem still to be having the worst trade service
percentage looking at the drastic drop down.

• And with the trade war still in shape, U.S. and China are
struggling with almost parallel movement.
Tables below shows Macro Economic Data
Table 1
united states macro economic indicator

Reference
Overview Last Previous Range
Date (2019)

GDP Growth Rate (%) 2.1 19-Jun 3.1 -10 : 16.7

GDP Annual Growth Rate (%) 2.3 19-Jun 2.7 -3.9 : 13.4

Unemployment Rate (%) 3.7 19-Jun 3.6 2.5 : 10.8

Non Farm Payrolls (Thousand) 224 19-Jun 72 -1959 : 1118

Inflation Rate (%) 1.6 19-Jun 1.8 -15.8 : 23.7

Inflation Rate Mom (%) 0.1 19-Jun 0.1 -1.8 : 1.8

Interest Rate (%) 2.25 19-Jul 2.5 0.25 : 20

Balance of Trade (USD Million) -55520 19-May -51224 -67823 : 1946

Current Account (USD Million) -130400 19-Mar -143927 -215769 : 9957

Current Account to GDP (%) -2.4 18-Dec -2.3 -6 : 0.2

Government Debt to GDP (%) 106 18-Dec 105 31.8 : 119

Government Budget (% of GDP) -3.8 18-Dec -3.5 -9.8 : 4.5

Business Confidence (Index Points) 51.7 19-Jun 52.1 29.4 : 77.5

Manufacturing PMI 50 19-Jul 50.6 50:57.9

Non Manufacturing PMI 55.1 19-Jun 56.9 37.8 : 62

Services PMI (Index Points) 52.2 19-Jul 51.5 49.3 : 61

Consumer Confidence (Index Points) 98.4 19-Jul 98.2 51.7 : 111

Table 2
China Macro Economic Indicator

Reference Date
Overview Last Previous Range
(2019)

GDP Growth Rate (%) 1.6 19-Jun 1.4 1.4 : 2.4

GDP Annual Growth Rate (%) 6.2 19-Jun 6.4 3.8 : 15.4

Unemployment Rate (%) 3.67 19-Mar 3.8 3.67 : 4.3

Inflation Rate (%) 2.7 19-Jun 2.7 -2.2 : 28.4

Inflation Rate Mom (%) -0.1 19-Jun 0 -1.8 : 2.6

Interest Rate (%) 4.35 19-Jun 4.35 4.35 : 10.98

Cash Reserve Ratio (%) 13.5 19-Jul 13.5 06:21.5

Balance of Trade (USD HML) 510 19-Jun 417 -320 : 613

Current Account (USD HML) 490 19-Mar 546 -341 : 1331

Current Account to GDP (%) 0.4 18-Dec 1.3 -3.7 : 10.1

Government Debt to GDP (%) 50.5 18-Dec 46.8 20.4 : 50.5

Government Budget (% of GDP) -4.2 18-Dec -3.7 -4.2 : 0.58

Business Confidence (Index Points) 49.7 19-Jul 49.4 38.8 : 59.2

Manufacturing PMI 49.4 19-Jun 50.2 47.2 : 52.3

Non Manufacturing PMI (%) 53.7 19-Jul 54.2 50.8 : 62.2

Services PMI (Index Points) 52 19-Jun 52.7 50:54.7

Consumer Confidence (Index Points) 123 19-May 125 97 : 126

Table 3
Iraq Macro Economic Indicator
Reference
Overview Last Previous Range
Date (2018)
GDP Annual Growth Rate (%) -1 18-Dec -3.8 -56.4 : 54.16
Unemployment Rate (%) 14.8 17-Dec 15.1 14.8 : 28.1
Inflation Rate (%) -0.8 19-May 0.7 -6.37 : 76.55
Interest Rate (%) 4 19-Jun 4 4:20
Balance of Trade (USD Million) 18793 17-Dec 7090 -3492 : 47550

Current Account (USD Million) 13954 17-Dec 2158 -15410 : 32344

Current Account to GDP (%) 4.9 18-Dec 2.1 -24 : 12.7

Government Debt to GDP (%) 48.4 18-Dec 59.6 32 : 344
Government Budget (% of GDP) 6.2 18-Dec -1.6 -34.9 : 10.7
Corporate Tax Rate (%) 15 18-Dec 15 15:15
Personal Income Tax Rate (%) 15 18-Dec 15 15:15

Source: Trading Economics

 Correlation coefficient of economic growth using GDP
▪ Testing correlation directly on the dataframe of the country’s GDP, the
visualization return all pair-wise correlations between columns; that's why we
observe 1s at the diagonal of the matrix (each column is perfectly correlated
with itself). Minimum coefficient shows 0.48
 Sub-period Correlation coefficient of economic growth
using GDP
▪ However, testing correlation on sub-periods from 2008 and after in order to
see if the structural changes in the global economy changed the correlations
between the economies.
Correlation of Exports and Imports
Quick Check

Do structural changes in the analyzed economies happened at the same

time, visual inspection of GDP, exports, imports as well as Chow test? If they
happened at the same time then we can say a common event determined
this for instance trade war if not, then there are other individual factors
amongst others.
• The Chow test is commonly used to test for structural change in some or all
of the parameters of a model in cases where the disturbance term is
assumed to be the same in both periods.

• The Chow test is an application of the F-test.

 China U.S.

From the break point at observation of the two countries tested in

essence U.S and China, their p-value is less than 5.0% which is
2.5%. Hence, we can reject the Null Hypothesis of no structural
break. Therefore, there is structural break. The figures below show
the point of the breaks. The dotted vertical lines indicated the break
dates; the horizontal red lines indicate their confidence intervals
 Discussion
• Immediate Effects
Decreased Imports
Medicines
Food Imports
Agricultural Inputs – fertilizer, pesticides, spare parts
Industrial/Commercial inputs/parts
Other spare parts
Fuel
Educational materials
Water Purification/supply inputs

Decreased Exports
Impact on export earnings, access to foreign currency, etc.
Decrease in Communications - Including telecommunications, media
Impact on Diplomatic Efforts
• Long Term Effects (Chronic)
Health
Reduction in the overall (general) health status of the population
Deterioration in health services and diminished national capacity to provide care;
Loss of previous gains in preventive and curative care services.
Economic
Chronically decreased economic activity;
Decline in revenue from all sources;
Decline in GDP, GNP, per capital income;
Loss of trade partners, regional/international trade interests;
Chronically high unemployment
Collapse of public and private infrastructure
Declined public education.
Social
Increase poverty
Increase in social inequality (Income gap between rich and poor);
Social upheaval, violence distress
Decrease in social cohesion
Psychosocial impact difficult to measure
Political
Impact on democracy
Impact on human rights, previously-observed democratic freedoms
Change in regional balance of power, security
 Conclusion
▪ World GDP growth will slow far worse than 3.2% this year, from
3.5% in 2018, before picking up slightly in 2020 if the trade war do
not linger further. However, if the tension continues with the raise of
tariff by US on China, Venezuela, Iraq and in recent time Mexico
where Trump threatened to impose a 5% tariff on all Mexican imports
unless Mexico curbs the flow of “illegal migrants” into the US, we
might be discussing far worse repercussion and late remedy to
the World growth.

▪ However, it has been concluded that the tariffs significantly

reduce US gross domestic product (GDP), employment and
investment, while export and import prices will rise, making US and
China products less competitive overseas and consumer products
more expensive for American, Chinese shoppers, while countries on
the sidelines would experience collateral damage.