In a sharp departure from this time last year, the global economy is now being buffeted by growing concerns over US President Donald Trump’s trade war, fragile emerging markets, a slowdown in Europe, and other risks. It is safe to say that the period of low volatility and synchronized global growth is behind us.
.. In 2017, the world economy was undergoing a synchronized expansion, with growth accelerating in both advanced economies and emerging markets. Moreover, despite stronger growth, inflation was tame – if not falling – even in economies like the United States, where goods and labor markets were tightening... Stronger growth with inflation still below target allowed unconventional monetary policies either to remain in full force, as in the eurozone and Japan, or to be rolled back very gradually.. Markets gave US President Donald Trump the benefit of the doubt during his first year in office; and investors celebrated his tax cuts and deregulatory policies. Many commentators even argued that the decade of the “new mediocre” and “secular stagnation” was giving way to a new “goldilocks” phase of steady, stronger growth... Though the world economy is still experiencing a lukewarm expansion, growth is no longer synchronized. Economic growth in the eurozone, the United Kingdom, Japan, and a number of fragile emerging markets is slowing... while the US and Chinese economies are still expanding, the former is being driven by unsustainable fiscal stimulus...with the US economy near full employment, fiscal-stimulus policies, together with rising oil and commodity prices, are stoking domestic inflation... the US Federal Reserve must raise interest rates faster than expected, while also unwinding its balance sheet... the prospect of higher inflation has led even the European Central Bank to consider gradually ending unconventional monetary policies, implying less monetary accommodation at the global level. The combination of a stronger dollar, higher interest rates, and less liquidity does not bode well for emerging markets... Despite strong corporate earnings – which have been goosed by the US tax cuts – US and global equity markets have drifted sideways in recent months... The danger now is that a negative feedback loop between economies and markets will take hold. The slowdown in some economies could lead to even tighter financial conditions in equity, bond, and credit markets, which could further limit growth... Since 2010, economic slowdowns, risk-off episodes, and market corrections have heightened the risks of stag-deflation (slow growth and low inflation); but major central banks came to the rescue with unconventional monetary policies as both growth and inflation were falling... These risks include the negative supply shock that could come from a trade war; higher oil prices, owing to politically motivated supply constraints; and inflationary domestic policies in the US... this time the Fed and other central banks are starting or continuing to tighten monetary policies, and, with inflation rising, cannot come to the markets’ rescue this time.Another big difference in 2018 is that Trump’s policies are creating further uncertainty. In addition to
- launching a trade war, Trump is also
- actively undermining the global economic and geostrategic order that the US created after World War II.
.. the Trump administration’s modest growth-boosting policies are already behind us, the effects of policies that could hamper growth have yet to be fully felt. Trump’s favored fiscal and trade policies will crowd out private investment, reduce foreign direct investment in the US, and produce larger external deficits.
- His draconian approach to immigration will diminish the supply of labor needed to support an aging society.
- His environmental policies will make it harder for the US to compete in the green economy of the future.
- And his bullying of the private sector will make firms hesitant to hire or invest in the US.
.. Even if the US economy exceeds potential growth over the next year, the effects of fiscal stimulus will fade by the second half of 2019, and the Fed will overshoot its long-term equilibrium policy rate as it tries to control inflation; thus,
achieving a soft landing will become harder.
.. By then, and with protectionism rising, frothy global markets will probably have become even bumpier, owing to the serious risk of a growth stall – or even a downturn – in 2020.
.. With the era of low volatility now behind us, it would seem that the current risk-off era is here to stay.
How to Protect Workers Without Trade Tariffs
Donald Trump’s trade war is an international tragedy. But it could have a happy ending if it eventually reminds us of the risks that free trade imposes on people, and if we improve our insurance mechanisms to help them.
.. on July 11, only 39% of respondents approved of US President Donald Trump’s imposition of tariffs on foreign countries, while 56% were opposed. But, while it’s good news that a majority of Americans oppose their president on this key issue, Trump is plunging ahead, apparently thinking the public will like the tariffs better when they are in place... So, why are we seeing so much public support for a US-initiated trade war now?It must stem from the job insecurity sometimes imposed by free trade, and the sense of injustice that arises when one is among the losers. Most people do not want charity. Voters in the United States responded well to “Make America Great Again.” They did not respond well to former President Barack Obama’s “spread the wealth around.”
.. programs such as Trade Adjustment Assistance in the US. Trade Adjustment Assistance allows people who can demonstrate that their jobs were lost to foreigners because of free trade to receive temporary compensation while they find a new job.
.. In my 2003 book The New Financial Order, I argued in favor of privately issued “livelihood insurance,” which protects against long-term loss of income and sets premiums on the basis of occupation and training.
.. if the government offers the coverage against risks to livelihoods from free trade, it just looks like redistribution. This is especially so because the risks of maintaining free trade with low tariffs may be long-term. Losing one’s job in the US steel industry as mills shut down in the face of foreign competition may look awfully permanent. But it is hard to imagine governments subsidizing displaced workers for decades.
.. with increased globalization an apparently permanent new condition, and with inequality within countries widening, people tend to feel that their long-term economic situation is getting riskier.
We need to find a way to insure people against the risks of the global market without in any way demeaning them.
.. When the government spends tax money on universal public education and health care, it does not strike many as redistribution, because the services are offered to everyone, and accepting them appears more patriotic than abject. As long as most people use the government schools and doctors, redistribution does not look like charity.
.. Another solution is to have the government encourage private livelihood insurance by subsidizing it to help cover the cost of jobs lost because of foreign trade. Private insurance companies, competing against each other and subject to appropriate regulations, may show much more entrepreneurial creativity in successfully managing the risks that free trade imposes on individuals.
.. Trump’s trade war is an international tragedy. But it could have a happy ending if it eventually reminds us of the risks that free trade imposes on people, and if we improve our insurance mechanisms to help them.
China’s Taste for Soybeans Is a Weak Spot in the Trade War With Trump
Beijing’s retaliatory tariffs make American soy pricier. But the country’s huge demand for oil and animal feed makes it tough to stop importing overnight.
.. XIAOWUSILI, China — For all its economic might, China hasn’t been able to solve a crucial problem.Soybeans. It just can’t grow enough of them.
That could blunt the impact of one of the biggest weapons the country wields in a trade fight with the United States.
.. Last year, soy growers in the United States sold nearly one-third of their harvest to China. In dollar terms, only airplanes are a more significant American export to China
.. Over all, she is not producing much more today than she was a decade ago. Her fields are small and not irrigated. The new, supposedly higher-yielding seeds promoted by the government are not much better than the older varieties, she says.
.. Farm goods could be a big weakness for China should the trade conflict with the United States turn into an all-out brawl.
.. China’s increasingly wealthy people want more and better food on their plates. But the country’s farms are generally too small and underdeveloped to keep up.
..Nearly 90 percent of the soybeans China consumed last year came from overseas — more than 100 million tons in total. (Mexico, the world’s No. 2 importer, bought just five million tons.)
.. To increase the availability of other types of animal feed, China’s customs authority removed inspection requirements on a variety of agricultural byproducts, including peanut meal, cottonseed meal and rapeseed meal
.. the provincial government offered generous subsidies to farmers both for growing soybeans and for switching their fields to soy from corn.
.. his farm cooperative requires that members rotate their crops to keep the soil healthy.
.. China would need to dedicate a huge fraction of the entire nation’s farmland — between a quarter and a third, by various estimates — to soy if it wanted to be self-sufficient.
.. Many people from Heilongjiang are already growing soybeans across the Amur River in the Russian Far East, where land is cheap and plentiful... farmers in Heilongjiang acknowledge they are a long way from being as productive as farmers in the United States, where agriculture is more mechanized and genetic modification is embraced.
.. Modern farming is expensive, however. And in Mr. Hou’s case, it involves a secret weapon: American technology.
.. a yard full of bright-green John Deere farm machines, which Mr. Hou buys with the help of government subsidies. Chinese machinery is cheaper but more prone to breakdowns, he says.
Even some of the fertilizer Mr. Hou uses comes from the United States.
.. “We rely first on the heavens,” the saying went. “We rely second on American diammonium phosphate.”
The Murder-Suicide of the West
Trump forcefully caps off years of deterioration in European-American ties.
.. This trans-Atlantic partnership was a vast historical accomplishment, a stumbling and imperfect effort to extend democracy, extend rights, extend freedom and build a world ordered by justice and not force. Since 1945 it is the thing we have all taken for granted.
Over the weekend, Trump ripped the partnership to threads. He said the European Union is our “foe.” On Monday, Trump essentially sided with Vladimir Putin, who has become the biggest moral and political enemy of the Euro-American relationship. Trump essentially dropped a project that has oriented American culture and policy for centuries. He pointed us to a world in which the central ethos is that might makes right.
.. Progressives fell into the poisonous trap of racialism. They looked at the glories of Aristotle, Shakespeare and Mozart, and the most interesting thing they had to say about them was that they were dead white males. Future historians will marvel at how sophisticated people willfully made themselves so simple-minded. Eurocentrism became a code word for colonialism, oppression and privilege, taking a piece of European history for the whole of it.
Europeans didn’t help. In the wake of the Cold War, they have dedicated themselves to a post-nationalist project that is too top-down and technocratic and is now crumbling.
.. Trump could have gone to last week’s NATO summit and taken credit only for increased European military spending. Instead, he moved the goal posts, humiliated the Europeans, reasserted his trade war talk and made it impossible for European leaders to do anything that might seem to support him. These are the actions of a man who wants the alliance to fail.
His embrace of Putin Monday was a victory dance on the Euro-American tomb.
“This is not just another family quarrel,” Kagan writes. “The democratic alliance that has been the bedrock of the American-led liberal world order is unraveling. At some point, and probably sooner than we expect, the global peace that that alliance and that order undergirded will unravel, too. Despite our human desire to hope for the best, things will not be okay.”