Thu Aug 04
Trump’s Trade War Against China is Ruining the Globalization that America Founded
President Trump’s trade war with China and its increasing disengagement on the world stage threaten to undermine global economic growth, according to the former head of the Bank of England, and the outgoing head of the IMF.
Globally prominent economic minds are raising alarms about global financial security, saying that President Donald Trump's trade war with China and his protectionist policies are creating a drag on growth that is hurting economies around the world.
“The U.S.-China escalation is the big story of the moment and there’s no resolution in sight,” said Nicolas Véron, a senior fellow at Bruegel think tank in Brussels and at the Peterson Institute for International Economics.
At the recent meeting of the International Monetary Fund in Washington, D.C., trade tensions emerged as a chief concern, with the organization’s World Economic Outlook showing that trade practices already are causing growth to decelerate.
“President Trump’s trade war has done significant damage to the U.S. and global economies,” said Mark Zandi, chief economist at Moody’s Analytics. Zandi said the trade war has shaved half a percentage point off global GDP growth and cost the U.S. 375,000 jobs.
The IMF forecast a global growth rate of 3 percent this year, a 0.3 percentage point drop since its last report in April and the lowest since the last recession. In the report , IMF chief economist Gita Gopinath listed an increase in trade protectionism and “elevated uncertainty” pertaining to trade and other geopolitical issues as the first two impediments to more robust economic expansion.
Gopinath said the global economy is undergoing a “synchronized slowdown,” despite an environment of accommodative monetary policy.
Former Bank of England governor Mervyn King, who presided over the central bank during and after the financial crisis and recession of 2008 and 2009, said at the IMF meeting that the United States’ trade war with China and its increasing disengagement on the world stage are two primary risks that threaten to undermine global economic growth. The world is in a “great stagnation ,” he said. He warned that, absent changes to the current trajectories set by monetary and fiscal policymakers around the world, another instance of destabilization would leave central banks around the world with few tools to fight back.
In an interview on CBS' "60 Minutes " that aired on Sunday, former IMF director and incoming European Central Bank chief Christine Lagarde also elaborated on how the White House’s trade protectionism is holding back spending and investment.
“I think the biggest key that President Trump has is in relation to predictability and certainty of the terms of trade. It's the unknown which is hurting, because you can't adjust to the unknown,” she said, adding that a lack of predictability deters companies from spending and contributing to economic expansion. “They sit on their cash,” she said.
Zandi concurred with Lagarde’s assessment. “The higher tariffs have brought global trade to a standstill and the uncertainty has undermined business confidence and investment,” he said. “If President Trump follows through on his threats to raise tariffs on vehicle imports into the U.S. in November or on Chinese imports in December, then the U.S. and global economies are likely to suffer downturns next year.”
With so much uncertainty swirling around Trump, trade experts said next year’s election could be pivotal in the business community’s willingness to invest. “The 2020 election, of course, is the big issue in all these discussions at this point,” Véron said. “If Trump wins, that will probably mean no end to the trade war.”
Goods-producing industries both in the U.S. and abroad are already suffering, Zandi said. “The U.S. manufacturing, agriculture and transportation industries, accounting for approximately one-fifth of output, are in recession,” he noted.
The IMF also noted the wide-ranging nature of the trade war’s impact in manufacturing and production output. “A notable feature of the sluggish growth in 2019 is the sharp and geographically broad-based slowdown in manufacturing and global trade,” Gopinath said. “Higher tariffs and prolonged uncertainty surrounding trade policy have dented investment and demand for capital goods.”
Lagarde said that if the U.S. and China fail to reach a resolution and the trade war escalates, the ripple effects could be felt worldwide to an even greater extent. “It's certainly going to give a big haircut to the global economy,” she predicted.
Until about 50 years ago, people paid attention to the area where they lived. They read local papers, shopped at local merchants, and socialized at local events.
Technology ended all that. Now we get our news from the internet. We buy imported goods. We converse on social media with friends thousands of miles away.
This “globalization” process changed the world, sometimes for the better but with significant side effects. Hence, today’s dissatisfaction.
Now, technology is swinging the pendulum back. Globalization is going in reverse. And again, the process will hurt some people.
We can’t stop it, but we can minimize this pain by letting it occur gradually. Give everyone time to adapt.
President Trump doesn’t see it that way. He wants to de-globalize now, no matter the cost.
We all think Trump changed everything. He certainly changed some things, but it’s striking how many of today’s megatrends were already in motion before he took office.
I wrote this in August 2016, when I thought Trump would surely lose the election.
Humanity spent the last 50 years globalizing. Now, thanks to certain technologies, that whole process is going in reverse. I think historians will mark the 2008 financial crisis as the turning point: Peak Globalization.
I don’t say this because I want a de-globalized world. What any of us want or don’t want is irrelevant. I believe the transition will happen whether any of us want it or not.
It will not happen in a linear fashion, though. The process that brought us to this point had starts, stops, and slowdowns. Reverse globalization will have ups and downs, too, but a new set of technologies will keep pushing it forward.
I didn’t anticipate that Trump would be in position to attack all things global—and particularly China—like a wrecking ball demolishes a building. As a result, this process I thought would unfold over decades is now occurring far faster.
The president’s trade war and attacks on various international institutions were big dents. But last week, he took it to another level, saying the US and Chinese economies should separate completely.
Sigh. Where to begin? I could fact-check these tweets and show how wrong he is. But let’s stick with the broader point.
As the rhetoric and tariffs escalate, it is growing clear that Trump doesn’t just want China to play fair. He wants to sever the economic relationship completely. We’re “better off without them,” he says.
In fact, he feels so strongly he orders American companies to look for alternatives to China.
Many analysts laughed off that threat. He can’t do that, they said. But what if he can?
The Day That Trump Failed to End Globalization
Often, crises are moments of truth. Some leaders prove in these moments to be up to the stakes, others collapse. The forces behind decisions, interests and ideologies become clearer. President Tump's solemn address to the American nation on Wednesday evening on the coronavirus crisis deserves a special mention. On that day, Donald Trump was preparing to put an end to the world economy as we knew it.
This presidential address was not an impromptu statement. Read from a prompter from the Oval Office of the White House, in prime time, it left little room for improvisation. What did President Trump say? After announcing the suspension of all travel from Europe for the next 30 days, he added that "these prohibitions will not only apply to the tremendous amount of trade and cargo but various other things as we get approval. Anything coming from Europe to the United States is what we are discussing."
These statements caused stupor. It is inconceivable to stop all flows from Europe. Transatlantic trade is the world's leading trade route: USD 1300 billion worth of goods and services pass through it every year, twice as much as for Sino-American or Sino-European trade. All sectors of the economy are dependent, in one way or another, on this trade route.
The US economy would not withstand it any more than the European economy. What Trump proposed was not far from a self-imposed embargo on his own country, the kind of measures usually taken during a major conflict to strangle an enemy. The text of the speech sent by the White House a few minutes after contained these words. It was not a mistake.
Donald Trump was forced to back down. He tweeted in the evening that "trade will not be affected. The restriction stops people not goods." This was too late. The markets have collapsed, raising the spectre of a serious and lasting global economic crisis, intentionally fuelled on top of the public health one.
The fact that such a speech has been proposed and validated by the chain of command up to the President reveals reflexes that will no doubt be repeated when it comes to drawing the consequences of what we are going through.
First, the scapegoat rhetoric. After having minimized the epidemic, the Trump administration thought it needed a pretext to change its position without disavowing itself. In the pure populist tradition, the blame had to be put on someone else. It fall on Europe, as the alleged vector for importing this virus into the United States, which must now be stopped. It does not matter that the argument is false and that these measures have little effect (the United States has not issue mandatory confinement, the virus already circulates widely). For Donald Trump, from the beginning, the coronavirus crisis has been less a public health problem to be solved than a narrative battle to be won. This is true today, and will be true in the future.
Then, the retrenchment. The United States has been in a long phase of withdrawal from world affairs for years. This has been following a nationalistic and brutal stance since President Trump. International cooperation has little place in this context. It is hard to imagine the US administration, after blaming "a foreign virus", calling for coordination with these same foreigners to curb the spread of the virus and develop the necessary long-term responses. On the contrary: Die Welt tells us that President Trump tried to buy a German company that manufactures a possible vaccine in order to reserve it for the Americans. So much for joint international efforts.
Finally, this reveals the extent to which Donald Trump's anti-European obsession is gaining the upper hand. After calling Europe a "foe" and allowing the idea that the United States might leave NATO to float, the open trade war with China has left some European politicians hoping to have slipped through the cracks - so much so that the European Commission has started to consider a new trade agreement with the United States. This was a misperception. Donald Trump had warned that as soon as tensions on the Chinese front stabilised, Europe would be next on the list. It is no coincidence that he is now pointing to Europe as the culprit for the spread of the coronavirus.
Donald Trump's term of office may come to an end at the end of the year. But it may not. There will be profound lessons to be learned from the coronavirus crisis for the world economy. Recognizing that a some important elements will have to change, President Macron has called for "breakthrough decisions". If anyone wonder about what the Trump administration response might in the aftermath of the crises, this episode provided some insight. It is up to Europe to prepare for this, while hoping of finding back its allies as soon as possible.