The net result is the following probabilities for potential outcomes: a 60 percent chance of negotiated tweaks that retain the current trading system but make it fairer; a 25 percent chance that the world slips into a full-blown trade war; and a 15 percent chance that this proves to be a highly favorable “Reagan Moment” for the international system.
This probability distribution, while generally reassuring, involves nevertheless a significant left tail. In other words, it is vulnerable to a policy mistake that would lead to recession, financial instability and greater geopolitical tensions.
Central Banking Policy Normalization:
The third uncertainty concerns the aftermath of the period of prolonged policy experimentation by systemically important central banks.
Coming out of the global financial crisis, these institutions took correlated and, at times, coordinated action to apply unconventional measures to inject significant liquidity. This is no longer the case. Now, the Federal Reserve is well advanced in normalizing its stance and there is enough evidence to suggest that it will succeed in a “beautiful normalization” that will involve neither derailment of growth nor significant dislocations to asset prices.
But that doesn't mean there is no uncertainty. No one knows how the global economy and markets will respond when two other systemically important central banks -- the Bank of Japan and the European Central Bank -- move simultaneously to normalize policy. What we do know is that asset markets have benefited significantly from the liquidity injections, and a lot more than the real economy; that there are concerns about excessive risk-taking in some segments; and that not all European countries are underpinned as yet by sufficiently robust economies. Turkey
The final and least important risk is Turkey’s currency crisis.
Turkey's efforts to rewrite the rules of crisis management make the spillover effects of this emerging-market dislocation harder to predict. Until now, it has shunned the use of interest rate policy and International Monetary Fund help to support its domestic policy adjustments. As a result, there is a notable risk that the current phase of technical contagion will develop broader and more disruptive economic and financial dimensions.
Of course, Turkey is the most vulnerable to this dynamic. It is followed by the most fragile emerging countries (those with immediate and large funding needs, as well as other financial mismatches).
Western Europe could also feel some vulnerability given Turkey's economic size and its trade links. But, as long as its labor market remains strong and business investment continues to pick up, the U.S. would be largely insulated economically (though there are important geopolitical issues connected to Turkey’s NATO membership, its strategic location, and the like).