Former central banker warns that ongoing trade tensions 'can get out of control very quickly'

  • Raghuram Rajan, former central bank governor for India and current finance professor at the Chicago Booth School of Business, warned that trade bargaining and threats of tariffs could result in a "lose-lose situation."
  • "Some of these situations can get out of control very quickly," he warned.

The escalating trade conflict between the U.S. and many of its economic partners "can get out of control very quickly" and "really hamper global growth," said Raghuram Rajan, a finance professor at the Chicago Booth School of Business.

"The key question is whether these bargaining ploys, threats of leveling tariffs, et cetera result in real negotiation which create that win-win situation; or do entities, do players get locked into positions which mean they actually have to carry out their threats? In which case we're in a lose-lose situation," Rajan told CNBC's "Squawk Box" on Tuesday at the Nomura Investment Forum in Singapore.

"Some of these situations can get out of control very quickly," added Rajan, who's also the former central bank governor in India.

In a speech at the forum, Rajan warned that investors cannot take it for granted that "sensible negotiations" will happen between the U.S. and its trading partners.

Raghuram Rajan in 2013.
Punit Paranjpe | AFP| Getty Images
Raghuram Rajan in 2013.

That's especially so when "too many countries are led by too many strong leaders," who would find it hard to back down from their tough stance, he added.

As it is, President Donald Trump's administration has turned threats into actions by slapping tariffs on aluminium and steel imports from Canada, Mexico and Europe. All three have retaliated and are challenging the U.S. decision at the World Trade Organization.

Negotiations between the U.S. and China — the two largest economies in the world — also appeared to reach a standstill. U.S. Commerce Secretary Wilbur Ross left China without a deal that the U.S. had hoped could narrow the two country's trade balances.

Such tensions, if prolonged and deepened in the coming months, are some of the biggest risks to the current global growth momentum, Rajan told CNBC: "That could really hamper the global economy."

"I think the U.S. administration, at this point, is rejecting that global system of rules-based trade and is moving towards one where it thinks it can exercise its own power in order to get a better deal from others," he said. "There's a reason why we stayed away from this because there's a potential for threats to turn into actual bad behavior and I worry that we're getting closer to that point."