China and the US: an odd couple doomed to co-operation
    
 It might take a communist leader to convince Donald Trump of the merits of free trade
     
 by: Martin Wolf
   

 

The future of our world heavily depends on relations between the US, a young country and the incumbent superpower, and China, an ancient empire and a rising superpower. Making these relations particularly challenging have been the election in the US of Donald Trump, a populist xenophobe, and the ascendancy of Xi Jinping, a centralising autocrat, in China.

No less contrasting, however, are the perspectives of these two on the world economy. Forty years ago, Mao Zedong ruled China: his aim was autarky. Ever since 1978, however, the watchword of China’s economic policy has been the “reform and opening up” proposed by his successor, Deng Xiaoping. Meanwhile, the US, progenitor of post-second world war liberal internationalism, is consumed with self-doubt and so has elected as leader a man who considers this outstandingly successful policy inimical to his country’s interests.

One of today’s ironies is this reversal of attitudes towards the open world economy. Nothing better illustrates this than the contrast between the strong support for globalisation offered by President Xi at the World Economic Forum annual meeting in Davos in January and Mr Trump’s egregious assertion, just three days later, that “protection will lead to great prosperity and strength”. The communiqué of the meeting of the Group of 20 finance ministers in Germany last weekend duly dropped last year’s language vowing to “resist all forms of protectionism”. The implications of such US protectionism are still unknown. But they are highly disturbing. The very last thing our fragile world economy needs is a trade war between the US and China.

Participation in this year’s China Development Forum has brought home to me some of the deeper roots of today’s disenchantment. Chinese participants told me privately that they had once looked to the US as the successful model of capitalism, democracy and economic opening. The global financial crisis, the election of Mr Trump and US protectionism have devastated its prestige in all three respects. Westerners complain, in turn, that the rhetoric of Chinese openness is far from matched by reality, pointing not least to the promotion of national champions, especially in advanced industries. Another objection is to commercial cyber espionage. In addition to this is disappointment that support for China’s economic opening has not yet led to greater democracy.

Yet it is also evident that this odd couple is doomed to co-operate if essential global public goods — management of the global commons, international security and stable prosperity — are to be secured. Mr Trump may declare “America first”. The Chinese leadership may focus on the welfare of its own citizens. But neither will be able to deliver what they want without paying attention to the interests and views of others. It is astonishing that today the Chinese leadership seems to understand this better than that of the US.




When presidents Xi and Trump meet next month at Mar-a-Lago, the “winter White House”, in the first meeting between the two, a basis for co-operation needs to be found. The omens are not good. Mr Trump has targeted China’s trade and foreign exchange policies. He has even flirted with challenging the “One China” policy, under which the People’s Republic is the only legitimate Chinese state. To this must be added the gulfs in personality and experience between the “tweeter-in-chief” and the communist apparatchik, the dealmaking real estate developer and the triumphant climber of the party’s greasy pole.

If we merely focus on the economic dimension, how might this dialogue of the all-too-likely-to-be-deaf be saved?

First, the two leaders need to convince each other that neither will achieve his goals if they are in conflict. This is evidently true of an actual war. But it is also true of a trade war. Which country would lose most is an idle intellectual exercise. Without doubt, both would lose, directly and indirectly.

Second, Mr Xi needs to bring home to Mr Trump that his views on China’s policies are hopelessly out of date. China has spent $1tn of its currency reserves on keeping the renminbi up since June 2014. Between 2006 and 2016, China’s exports fell from 35 per cent to 19 per cent of gross domestic product. The all-conquering export machine is an old story.

Third, Mr Trump needs to tell Mr Xi that China’s industrial policies are a legitimate matter of concern to other countries. China can rightly argue it is a developing country. But it is also an economic colossus. Its development policies seem like predatory mercantilism to other countries. China needs to recognise that, in an interdependent world, others have a reasonable interest in what it does. This applies also to the size of its current account surpluses. Of course, Mr Trump has to understand similar points. If he does not care about the global consequences of what he does, why should China?




Fourth, China can help give Mr Trump what he wants. The US president wants greenfield industrial investments in parts of his country damaged by deindustrialisation. This can never be reversed. But Mr Xi can surely find Chinese businesses happy to invest in the US. Mr Trump likes such announcements. Mr Xi should help him.

Finally, Mr Trump wants an infrastructure boom in the US. China is by far the world’s greatest exponent of fast infrastructure delivery. It must be possible to marry China’s capabilities to Mr Trump’s objectives.




However contrasting the two countries may appear, they do share interests. Maintaining the open world economy is one of them. It is vital that Mr Trump be persuaded that his views on trade are mistaken. It is surreal that we depend on a Chinese communist to persuade a US president of the merits of liberal global trade. Yet today’s desperate times require such desperate measures.


Is the pope Catholic?

Francis is facing down opposition from traditionalists and Vatican bureaucrats

But on clerical sex-abuse, he seems weak

 .


THE Pacific island of Guam is more than 12,000km from Vatican City. Yet it was in this far-flung American territory that last month the two most contentious issues facing Pope Francis—the scandal of clerical sex abuse and a rebellion by traditionalists—intertwined. Cardinal Raymond Burke spent two days on Guam presiding at the church trial of Archbishop Anthony Apuron, who is accused of molesting altar boys. The archbishop is the highest-ranking Catholic cleric to be tried on sex-abuse charges. The proceedings could last years. Cardinal Burke, an arch-conservative, is the pope’s most outspoken critic.

The defiance of papal authority by a minority of senior Catholic clergy has become more brazen in recent months than at any time since the 1970s, when the late Archbishop Marcel François Lefebvre refused to disband his arch-traditionalist Society of St Pius X. Last month Vatican officials received in their e-mail what appeared to be a digital version of the Vatican’s newspaper, L’Osservatore Romano. On opening it they found a perfect facsimile ridiculing the man Catholics are told is God’s representative on Earth. The headline was “He’s Replied!”—a sarcastic reference to the pope’s refusal to answer a letter from four cardinals, including Cardinal Burke, last September (and, most unusually, made public by them in November). The letter challenges Francis to state that passages in his apostolic exhortation, Amoris Laetitia (The Joy of Love), conform with established doctrine. In the fake-news Osservatore, all four replies were “Yes and No”. Less than a week earlier, posters had appeared in Rome calling on the pope—disrespectfully addressed in Roman dialect as Francé (“Frankie”)—to say how his vaunted advocacy of mercy squared with his forthright treatment of Catholic institutions including the Roman Curia, the church’s central administration.
 
Rock of ages
 
As the protests showed, discontent within the church comes from two sources and two overlapping camps. The first is the most obviously conservative. It includes those, inside and outside the Vatican, who seek clarity and certainty from their religion and think the rules cannot be altered without forsaking the essence of Catholicism. They are appalled by what they see as Francis’s lack of interest in theology, and his abandonment of principle in the name of a nebulous requirement for mercy.

Last year Anna Silvas, an Australian scholar, charged the pope with writing “tracts of homespun, avuncular advice that could be given by any secular journalist without the faith—the sort of thing to be found in the pages of Readers Digest”. The conservatives’ biggest gripe is with Amoris Laetitia, which in a footnote opened the way for some remarried Catholics to receive the sacrament of the Eucharist, which Catholics believe is the very body of Christ.

Polls suggest that the faithful in Europe and the Americas strongly back the change. But critics see it as legitimising adultery. They will scarcely have been reassured when Francis last month encouraged a gathering of priests to show understanding for parishioners who were living together before marriage. On March 10th he again shocked traditionalists, suggesting that the church might ordain married men to help lessen an acute shortage of priests.

A second, much smaller band of critics is made up of Vatican-based clerics, whose objection is to the pope’s treatment of his officials. It is no secret that he has little sympathy with the Vatican. As archbishop of Buenos Aires, he was repeatedly frustrated in his dealings with its bureaucrats. Soon after his election as pope, he formed a team of cardinals to advise him on how to reform the Roman Curia, pointedly choosing most of them from among pastoral leaders beyond the Vatican’s high walls. Acting on its recommendations, he set up two new “super-ministries”, or secretariats, one for the Vatican’s finances and the other for its media operations, and merged six smaller “ministries” into two.

That alone would have earned Francis enemies in an organisation as notoriously resistant to change as the Roman Curia. But it is style as much as substance that has rankled. A Jesuit, Francis comes from an order founded by an ex-soldier, St Ignatius of Loyola, which supplied the Counter-Reformation with its shock troops. The Jesuits’ first pope is a humble and humorous man—but also a blunt and ruthless one. “The Holy Father is not a person who works easily with an institution,” remarks someone who has witnessed his uncompromising decisiveness at close quarters.
 
During the year after Francis’s election, he appalled the Vatican’s highest-ranking officials by listing 15 faults to be found in their ranks. One, he told his ageing listeners, was “spiritual Alzheimer’s”.

Most recently, the pope intervened in a dispute among the leaders of the Knights of Malta, an ancient military and religious order. Though they no longer govern territory (or take up arms to defend Christians in majority-Muslim countries), and largely devote themselves to good works, the order still wields the sovereignty it enjoyed when it ruled the island of Malta. It has many of the trappings of a state, maintaining diplomatic relations with more than 100 countries and holding observer status at the UN. It is legally separate from the Holy See. Yet on January 24th Francis demanded its grand master’s obedience and resignation. He later named a trusted associate to sort out the dispute from inside.

When Francis expects resistance from Vatican diehards, he sidesteps it. He ordered outsiders to draft changes to the rules on marital annulment (a declaration that a marriage was never valid; not to be confused with divorce, which the church does not sanction). He is said to have set up a commission to review new translations of liturgical texts, cutting out the relevant Vatican department, which is headed by Cardinal Robert Sarah, a conservative.

Unto the least of these my brethren
 
The biggest mystery surrounding this man, who combines toughness and compassion, is why he has not applied his rough-house tactics to the issue that most cries out for action: clerical sex abuse. It is more than just a moral matter. The priority of all the church’s recent leaders has been to halt the secularisation that began in its European heartland and is spreading through the Americas. Top of the list of reasons why many Catholics have abandoned their faith is disgust at the ever-mounting evidence of rape and molestation of minors by priests, which has been repeatedly overlooked, indeed covered up, by the offenders’ superiors. The Vatican continues not to require bishops to report allegations of abuse to the police, unless doing so is compulsory under civil law (which in many countries, including Italy, it is not).

In 2014 Francis set up a Pontifical Commission for the Protection of Minors. Doubts about its efficacy have circulated ever since. One member complained that it was under-funded. And last month it suffered a blow to its credibility with the resignation of the lone remaining abuse victim on the panel, Marie Collins from Ireland (the other victim, Peter Saunders, a Briton, was suspended without his knowledge last year). Ms Collins said that what decided her was the failure of the responsible Vatican department, the Congregation for the Doctrine of the Faith, to reply to victims’ letters. She has also spoken of the commission being “hindered and blocked by members of the Curia”.

Two of the commission’s most important recommendations have come to nothing. A tribunal to handle cases of bishops accused of failing to act on abuse claims was buried, and guidelines for dioceses on how to prevent, detect and respond to abuse have not been distributed. Cardinal Gerhard Müller, who heads the Congregation for the Doctrine of the Faith, protested that obstruction by the Vatican of efforts to curb child sex-abuse was merely a “cliché”. But he also remarked that he had never met Ms Collins.

Pope Francis has battled to force his church to reckon with a world in which many Catholics break church teaching by using artificial methods of contraception and cohabiting before marriage. A shrinking proportion share their religious leaders’ view of homosexual activity as sinful. But there is a growing danger that this pontiff may be remembered less as a valiant reformer and moderniser than as a pope who shrank from being as tough on predatory paedophiles and complicit bishops as he was with fogeys in the Vatican.


Free Trade and the G-20

By George Friedman


Between Machiavelli and Ricardo, one of them had a bad weekend.

The G-20 meeting held this weekend included many people, but the stars were the ghosts of David Ricardo, the father of free trade theory, and Niccolò Machiavelli, the father of political realism. Ricardo had a rough weekend.

At the insistence of the United States, G-20 members agreed to drop the forum’s commitment to free trade. That agreement was reached at one meeting and was contained in a single document. Such agreements and documents are far from written in stone. Nevertheless, it must be regarded as a historical moment. While many G-20 nations have practiced protectionism by formal or informal means when it suited them, allowing the commitment to free trade to be excluded from the agreement represents a fundamental shift in a concept that has been central to global economics for more than a generation, and sacred since Ricardo made the case for it.

The politics of this decision was simple: The United States insisted that the commitment be left out of the document. President Donald Trump campaigned on a platform arguing that free trade is not a principle, but rather a tool for improving the economic conditions of nations. If free trade failed to do so, it should be discarded. Trump argued that many nations, such as China, had not practiced free trade, although they had benefitted from it. In any event, the United States would examine trade relations and tariffs against a simple criterion: Does it benefit the United States?


U.S. Secretary of the Treasury Steven Mnuchin, right, and Japanese Finance Minister Taro Aso enter bilateral talks during the G-20 Finance Ministers and Central Bank Governors Meeting in Baden-Baden, Germany, on March 17, 2017. THOMAS KIENZLE/AFP/Getty Images


The U.S. indicated that it would not sign the G-20 agreement if it contained wording on free trade.

While there is much discussion on U.S. decline, the country still produces about 25 percent of the world’s GDP, which is a huge amount. Therefore, any document on global economics that does not contain an American signature is irrelevant. Not that the G-20 is averse to irrelevant pronouncements, but in this case, the U.S. wanted a showdown on free trade, and the other members backed away. The G-20 recognized that the handwriting for free trade is on the wall, once the United States put it there.

In the end, each nation pursues its own interests. For the most part, free trade has appeared advantageous to all of them. But the problem is that we are in an export crisis, as we have previously discussed at Geopolitical Futures. The year 2008 threw Europe and the United States into a recession.

This cut China’s exports at a time when other countries were becoming increasingly competitive.

While industrial commodity markets expected China to resume its exports and purchasing of raw materials, prices remained high. When it became evident that China would not return to prior export levels, the prices of oil and other industrial commodities collapsed. As long as the global economy remains sluggish – growing at less than 2 percent – those export numbers will not rise. Exporters are hostages to importers, and importers are not buying.

Whatever the theoretical virtue of free trade, the current problem is how to pump up economies so that they can afford more imports. Exporters are depending on importers to improve their own economies so that they can buy more exports. But increasing demand based on domestic consumption alone is difficult. Low exporters can do it, but increasing consumption in order to buy more goods from other countries can only undercut recovery.

Politically, in the post-2008 world, recoveries must be based on domestic consumption buying domestic production.

Free trade theory is, in the abstract, powerful. It dictates that if all nations concentrate on selling what they are most efficient at producing, leaving the rest to others, everyone will benefit. Accordingly, if the United States is not as efficient at producing steel as it is at producing computer code, it should stop producing steel and produce more computer code. The theory of comparative advantage that Ricardo laid out makes a great deal of sense abstractly, and the international system has since been in awe of the principle.

This principle has two problems. The first is distribution. Ricardo wrote at a time when labor was fungible. A farm laborer could adjust to working in a factory in 1800, for example.

Therefore, as product profitability shifted, new products would be produced, and laborers would shift jobs.

Steel workers are not computer coders, and they probably won’t learn the skill. Labor is no longer fungible. The outcome of this is that when you close steel mills to take advantage of software product, GDP may increase, but so will the worst kind of unemployment: non-cyclical unemployment that leaves workers without an equivalent salaried job for the rest of their lives.

In some social Darwinian sense this is acceptable, but in extending social Darwinism to politics, politicians are not going to let that happen.

The second problem is timing. A favorite phrase of economists is “in the long run.” The problem is that that human clock and the economic clocked run at different rates. Over the next 50 years, abandoning an industry to concentrate on another makes sense. But to a 45-year-old worker, this means his life will be ruined. Put enough lives at risk and the political system will intervene. True, we are depriving people 50 years down the road of the payoff, but our willingness to immiserate ourselves and our children for the wealth of the unborn doesn’t exist.

The political system is constantly intervening in the economic system and imposing suboptimal solutions on the economic system. But the economic system is constantly producing solutions that are politically unsustainable.

The distribution of the wealth of nations and the time it takes for the payoff are things that really don’t come to the fore until you have a massive shift in political reality triggered by a major economic malfunction. The 2008 crisis was not a normal cyclical event. It was not the kind of normal irrationality markets practice. Instead, it changed the entire economic dynamic of most of the world.

That has triggered a massive political shift. Free trade was easy to absorb prior to 2008. The situation for many was deteriorating, but cushioned by growth, and not progressing that quickly. After 2008, deterioration accelerated and the cushion kept getting thinner and thinner.

The law of comparative advantages meant that the production of many things would shift overseas, either by building factories in low-wage areas or importing products. The focus was on those things at which the U.S. excelled, such as technology, financial services and the rest.

This created the social distinction that dominated the last U.S. election. The law of comparative advantages benefitted coastal areas and parts of the interior, while much of the interior lost ground at a rapidly increasing rate.

Income distribution was being bifurcated before 2008. After 2008, it was bifurcated at an accelerating pace. The U.S. West Coast and the Northeast, home to technology, financial services and such things, emphatically supported Hillary Clinton. Depending on the circumstances, the rest of the country (a vast overgeneralization) saw free trade as a threat to their current incomes and future hopes. They voted for Trump. The U.S. then told the G-20 that free trade is off the table, and the G-20 agreed.

Because regardless of who is president, the U.S. is the 800-pound gorilla.

And so we come to the visit of China’s President Xi Jinping to Trump’s Mar-a-Lago Florida estate to meet with a president who can’t budge on free trade and still maintain his constituency. Xi can’t give up on free trade without increasing pain in China, a country he is struggling to manage. Ricardo is wincing. Machiavelli is grinning ear to ear.


Chinese Populism Could Give Investors a Rude Awakening

After several years of decline, China’s economic inequality is rising again. That could spell trouble for Western firms and for relations with the U.S. and Donald Trump

By Nathaniel Taplin


Modern China is the greatest “get rich” story of the past generation—maybe ever. But after a decade of growth lifting all boats, official data contain a dispiriting revelation: Income inequality is again on the rise.

A little-noticed government press release citing the backslide comes as the just-released Hurun Global Rich List shows China with the most billionaires for the second year in a row, edging out the U.S.

Slower broad-based income growth—and increasing numbers of isolated, angry Chinese men in the countryside—is problematic. And as in the U.S., income disparity boosts the chances of political upheaval somewhere down the line. These topics are well known in Beijing, where the Communist Party leadership prizes social stability and fair distribution of wealth as linchpins of its hold on power.

The government’s official inequality measure is the Gini coefficient, a zero-to-one measure of population income dispersion used by the World Bank and others. After declining by an average of over 0.4 percentage point a year from 2009 to 2015, official figures showed China’s Gini coefficient rising by 0.3 percentage point last year.

Other independent measures of inequality have also rebounded. Regional disparities began widening in 2015, in part due to slowing growth in poor northern and western industrial provinces, according to a recent paper from Andrew Batson, China research director at Gavekal Dragonomics. China’s statistics bureau cited slowing income growth for some rural agricultural workers as one reason for the uptick. So-called bare branches, low-income rural men with poor professional and marital prospects, have become a persistent topic of conversation in Chinese society.

While the shift is nascent, there are reasons to think it might continue. The massive transfer of wealth triggered by the privatization of the housing stock in the late 1990s was a huge boon to poor inland provinces, but it has now largely run its course.

And despite large helpings of rhetoric on reform from top leadership, there is little indication that the market power of big state firms in sectors such as telecommunications will be curtailed to make room for more efficient, job-creating privately run firms.

For firms eyeing China, the implications are profound: Slower broad-based income growth could weaken sales prospects for basic consumer goods. Companies such as Yum China or Coca-Cola, already under pressure from regulatory scrutiny and local competition, could see a slower lift from core consumers.

More rich people in China might seem to present an opportunity, particularly in luxury goods and travel, real estate, and financial services. Firms such as Apple may be less tempted to pursue a pricing strategy based on volume, rather than luxury prestige.

Yet the past few years under President Xi Jinping have showed an inclination to punish conspicuous consumption. Rising inequality data may in fact embolden Beijing to keep up the pressure. Politically, corruption crackdowns to save face with the populace may become more frequent and severe. And nationalism, the old fallback of politicians bereft of other solutions to help disaffected citizens, will become more strident and potent.

That latter could make for choppy waters in the years to come, on both sides of the Pacific—and in the shipping lanes in between.


Latin America’s Barriers to Growth

Adriana Arreaza
. Guatemala economy


CARACAS – Latin America is expected to emerge from recession this year. But the region should not be overly optimistic. While economic growth is rebounding, it remains below 2%, on average.
 
And in a global environment plagued by uncertainty, the balance of risks is not tilted in Latin America’s favor.
 
The region’s economy is highly sensitive to global developments. In past decades, external tailwinds underpinned high growth rates; now, external headwinds are hampering growth for a second consecutive year, such that Latin America is underperforming any other emerging region.
 
Still, 2017 will be better than 2016, when economic performance suffered as a result of China’s slowdown and anemic recoveries in most advanced economies. Fears that Chinese GDP growth would continue to decelerate created shockwaves in financial markets and drove down commodity prices and asset prices in emerging markets. And while investors’ concerns dissipated somewhat as China’s economy stabilized over the course of the year, capital still continued to flee emerging markets for safer havens.
 
The United Kingdom’s “Brexit” referendum in June, and Donald Trump’s election as US president in November, only created more uncertainty and market volatility. Changing dynamics in the global economy made external financing more expensive. And, as Latin American countries’ currencies weakened, its external and fiscal accounts were stretched thin, narrowing the scope for countercyclical stimulus measures.
 
But the region is quite heterogeneous, and the severity of external shocks in 2016 varied considerably, depending on countries’ exposure and policy response. Some countries experienced unexpectedly intense economic shocks. Argentina and Ecuador slid into recession, while recessions deepened in Brazil and Venezuela. But other Latin American countries continued to grow, albeit at a disappointing pace.
 
Through all of this, labor markets suffered: unemployment increased and the quality of employment deteriorated. More workers were forced into informal jobs or self-employment, and real wages fell, owing to higher inflation, depreciating currencies, and certain idiosyncratic supply-side shocks. As households’ purchasing power declined, the number of people in poverty most likely increased.
 
But 2016 was not all bad news. As the year progressed, macroeconomic imbalances started to ease.
 
By the third quarter, the rate of inflation was falling in several countries, particularly those with inflation targets, and Brazil and Ecuador’s recessions seemed to be bottoming out. Moreover, many countries’ current-account deficits continue to narrow, though this probably reflects import contraction, not export growth.
 
To maintain and build on the notable social gains achieved in the first decade of this century, Latin America needs stronger, more sustained growth. That is why the region’s leaders should look beyond cyclical and external factors, and address structural problems that are limiting long-term productivity growth.
 
Half of Latin America’s population is still informally employed and performing low-productivity tasks. This has left the region trapped in a vicious circle: productive firms cannot expand for lack of human and financial resources. When productive firms do not grow, the supply of good jobs cannot keep up with demand, forcing workers to take refuge in the informal economy, and the cycle continues.
 
A recent study by CAF–Development Bank of Latin America found that far too few working-age Latin Americans (comprising 67% of the overall population) possess the skills that the labor market requires; and only a small fraction of the self-employed have the skills needed to become successful entrepreneurs. Like most workers, those managing their own businesses are more likely to remain in the informal economy, where they have little chance of creating highly productive firms that can grow quickly.
 
Misallocated resources are a significant drag on Latin American growth. There is too much capital and labor stuck in low-productivity sectors, and not enough left over for more productive firms and activities. Just imagine how much productivity suffers when half of the population is performing routine work far from the technology frontier; then imagine how much more it suffers when there is too little innovation and technological adaptation and diffusion ever to move that frontier.
 
To break their vicious circle, Latin American countries need to close infrastructure gaps, improve access to credit, enhance state capacity, and reduce institutional barriers that are impeding resource allocation and innovation. But, perhaps most important, they need to improve their workers’ qualifications and skills.
 
Now that globalization appears to be coming to a halt, and international trade is losing momentum, Latin America cannot count on global growth to fuel its own economic performance. Instead, it will have to look inward, by taking advantage of regional trade opportunities and strengthening its human capital.