Donald Trump trade threats lack credibility

US bluster has caused most of the world to rally to China’s side

Lawrence Summers


US President Donald Trump: his rhetoric notwithstanding, it is wrong to say nothing has been achieved through negotiation with China © AP


As the possibility of a trade war between the US and China looms, threats and counterthreats are hurled back and forth and markets gyrate, economic logic and truth appear to be an early casualty. There are certain points of fact on which there should be no disagreement.

First, globalisation and trade have caused significant disruption to the US economy but this has had little to do with trade agreements of the last generation. It is now clear that increased imports especially from China have inflicted substantial burdens on manufacturing workers, particularly in the the north central part of the country. Where too much conventional analysis goes wrong is in attributing this to trade agreements and in failing to recognise offsetting job gains from exports.

The reality is that the US economy was largely open by the 1980s and that every major trade agreement has reduced other nations’ trade barriers by far more than it altered any American trade barriers. This is most true of China’s 2001 accession to the WTO, in which the US only committed to continuing to keep its markets open on the most favourable nation terms that had already been ratified each year for more than a decade but won major changes in Chinese economic policy. The real reason for economic disruption was not trade agreements but the emergence of emerging markets as major participants in the global economy. This is not something the US could stop or, given its export interests and broader interests in global co-operation, could plausibly aspire to contain.

Second, much of President Trump’s rhetoric notwithstanding, it is wrong to say nothing has been achieved through negotiation with China. Only a few years ago, China’s current account surplus was the largest relative to GDP among significant countries, it was holding its currency down to maintain demand for its exports, and most software used on its personal computers and videos on sale in its major cities were pirated.

Today China’s global surpluses are far below past US negotiating targets of a few years ago, China has spent about $1tn propping up its currency, and IP protections are far better enforced than a few years ago for major US software and video producers. Of course major issues remain but the view that multilateral pressure without bluster is ineffective is belied by experience.

Third, extraction of IP through joint venture requirements is largely a problem for companies outsourcing production from the US and not for American workers. Corporations headquartered in the US often complain bitterly that if they wish to enter the Chinese market they must enter into joint ventures with Chinese counterparts who demand transfer of intellectual property and then operate on their own.

These complaints are often accurate. Notice, however, that they typically involve cases where the company in question produces for China in China and so have little impact on US employment. In many cases a substantial number of the company’s shareholders are foreign and it pays taxes to many governments. It is more than a little ironic that an administration that condemns outsourcing should make standing up for those who move production to China so central a priority.

Fourth, bilateral trade bluster is not an effective strategy for the US. While most countries feel somewhat threatened by Chinese trade and business practices, it has been the unfortunate accomplishment of US trade policy in recent months to cause most of the world to rally to China’s side because of our disregard for the WTO and the global system.

Not only does having many others on its side make it easier for China to resist the US, it also undercuts the effectiveness of our sanctions. China can still export to other markets and US producers who use Chinese inputs lose competitiveness when only they are forced to pay tariffs. History is clear that moments of high trade truculence like that pursued against Japan in the early 1990s accomplished very little while imposing substantial costs.

Fifth, threats have to be credible to be effective. In recent weeks, every time the US has pushed its strategy markets have had mini-collapses, and every time it has appeared to pull back markets have rallied. How in such a world can it seem credible that the US will actually carry through on its threats? And without credibility why should one expect strong responses from China? I return from a recent meeting with senior Chinese officials with the clear sense that they are more bemused than alarmed by what they see as a boomeranging US approach.

The US can do much better for itself and for the global economy but this is the subject for a subsequent column.


The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

The Geopolitics of London: Making a Global Financial Center

By Jacob L. Shapiro and George Friedman

Source: Geopolitical Futures (Click to enlarge)

Source: Geopolitical Futures (Click to enlarge)

Source: Geopolitical Futures (Click to enlarge)

Source: Geopolitical Futures (Click to enlarge)

Consumer Credit May Weigh on Economy

Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans

By Aaron Back


Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected. Photo: Erica Yoon/Associated Press 


Weak consumer lending risks becoming a headwind for an otherwise healthy economy.

Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans.

Monthly data from the Federal Reserve shows that total consumer loans outstanding rose at a seasonally adjusted annualized pace of just 3.3% in February, down from 4.9% in January and 6.0% in December.


For all of 2017, consumer loan growth already slowed, dropping to 5.4% from 6.8% the prior year, according to the Fed data.


CREDIT DOWNGRADE
Change in total revolving consumer credit, seasonally adjusted annual rate:

How Inequality Fueled the Euro Crisis

Benedicta Marzinotto



BRUSSELS – Since the Great Recession of 2007-2009, most economists have begun to regard finance as a key driver of the business cycle. But the precise dynamics are not yet fully understood.

For example, the University of Chicago’s Amir Sufi and Princeton’s Atif Mian argue that credit expansion leads to nasty recessions, which emerge as soon as households, for whatever reason, lose access to the financing they need to roll over their debts. But this argument misses a key factor, exemplified by the eurozone crisis.

The creation of the euro was accompanied by large-scale financial liberalization, including the elimination of capital controls and the adaptation of the legal framework to allow any European bank to open branches abroad. This process led to growing competition in the banking sector and a progressive increase in the ratio of private banks to public ones.

The result was an across-the-board decline in long-term interest rates, and an increase in credit as a share of GDP. European households almost everywhere became more indebted, but the impact of this credit expansion on private consumption was fundamentally different in the EU’s core countries, where current-account surpluses grew, and in the periphery, where countries accumulated deficits.

Why did the same credit-supply shock produce such varied responses? As a recent study shows, the eurozone’s financial-liberalization process amounted to a more profound shift for the periphery than for the core, with the former having had less open capital accounts, more public banks relative to private ones, higher long-term interest rates, and lower credit-to-GDP ratios.

The same study argues that in the more financially repressed peripheral countries, the main expectation associated with the liberalization process was that those who had previously lacked access to credit – say, because of low incomes or low savings – could now borrow, in order to finance more consumption. In other words, it was low-income households – which represent a large share of the population in the relatively more unequal countries of the periphery – that played the largest role in changing their economies’ external positions.

In the eurozone core, by contrast, the initial upshot of the euro’s introduction was mainly more and better saving opportunities, characterized by improved risk-return trade-offs. This primarily benefited wealthy households, which could, for example, borrow to make long-term investments that would finance future, rather than current, consumption.

Because higher-income households comprise a larger share of the total in these countries (which also tend to have lower levels of inequality), aggregate consumption remained subdued. With inequality starting to rise in the 1990s – particularly in Germany – these households had all the more incentive to increase their savings.

The contrasting trends in the periphery and the core were intensified after the global financial crisis erupted, and the eurozone entered recession. In the periphery, low-skill groups were the first to be ejected from the labor market. With troubled commercial banks more risk-averse, these struggling consumers could no longer borrow to roll over their debt and finance current consumption, which came to a halt, deepening the recession.

In the core countries, by contrast, the key borrowers were wealthy, and thus suffered the least. If they did face negative income shocks, they could use their savings as a cushion. So the severity of the bust was a function not simply of the level of household debt, but rather of the distribution of debt across income levels.

To some extent, this is good news. With the periphery having already endured the initial financial-liberalization shock, future credit-supply events are less likely to affect them disproportionately. And the shifting of macroprudential regulation from the national level to the European Union may reinforce this outcome by further helping to harmonize bank-lending behavior.

But there is a snag: EU-level financial regulation is limited to the large systemic banks. As a result, it is unlikely to affect the operations of the small local banks lending small amounts to impatient low-income consumers.

The best way to strengthen eurozone financial resilience is to address borrowing incentives. And the best way to do that is to improve the position of low-income borrowers by investing European resources in education and job quality. Even in the core, more equality of opportunity might improve morale, thereby reducing precautionary saving. Human-capital upgrading and more equality of opportunity should play a prominent role in negotiations over the EU’s next Multiannual Financial Framework, with the European Investment Bank possibly also providing support.

As it stands, the common denominator of existing eurozone-reform proposals is the completion of a banking union, which many believe is needed to reduce financial fragmentation and break the vicious circle between banks and sovereign debt. This is the area where progress is most likely in the run-up to June’s European Council meeting. But, while a banking union would be a positive step, it will be incomplete without efforts to reduce inequality.


Benedicta Marzinotto is Lecturer in Economic Policy at the University of Udine and Visiting Professor of EU Macroeconomic Policies and Governance at the College of Europe.