The state of the world economy

Hasnat Abdul Hye | Published: April 30, 2019 21:54:16 | Updated: May 08, 2019 21:35:38

That the global economic growth, as measured by gross domestic product (GDP), is fuelled by trade has been part of the conventional wisdom among policy makers across the spectrum of global economies for quite a long time. The degree of benefit from trade differed from country to country depending on their comparative advantages and number of tradable goods was a given in this assumption. Even the staunch proponents of free trade never claimed that the high tide of global trade lifted all boards together on in the same manner. While the beneficiary countries enjoyed cumulative advantage the so-called losers were not permanently in the dog house, it was pointed out bluntly by the advocates of a liberalised global economic order. This faith in free trade as the engine of growth was shared by all trading countries which after the fall of the Soviet Union covered almost all the globe including the market-oriented socialist bloc, particularly China.

Asymmetrical games from trade gave rise to protest by social activists, and the victims of globalisation represented by the unemployed in the countries that lost their traditional industries because of competition from cheap producers of goods. But at the state level fulmination against the global trade regime characterised by multi-lateralism was not only rare but was a no-brainer. That was until Donald Trump entered the White House riding on the populist supporters of his 'America First' battle cry.

The mantra of 'America First' had a single target to achieve the goal underlying it: to tear down multilateralism underpinning global trade regime. The growing deficit in the balance of payment that America had chalked up over the recent past was seen by President Trump and his cohorts as the result of the iniquitous global trading system that threatened America's security and undermined its economic interest. Using this as an article of faith, the Trump administration lost no time to draw up a raft of measures that almost upended the international trading regime: revising the terms of the North American Free Trade Area (NAFTA), pulling out of Asia-Pacific trading association, clamping huge tariff on European and Chinese steels and aluminum etc. Before the trading partners of America had absorbed the shock of the sudden protective measures taken by Trump administration came the threat of further imposition of tariffs on automobile parts and other imports from Europe and China. Suddenly, the trading partners of America were faced with uncertainty and great volatility in respect of trade that had become a normal practice among countries since the second world war. The world economy that had just turned a corner through various stimulus measures undertaken by governments and their central banks in the wake of the great recession of 2007-2008 faced a clear and present danger from the most unlikely source, the erstwhile champion of liberalism - America. Trump's `America First' electioneering slogan threatened to become a weapon of mass destruction aimed at the global economic order evolved over the years.

The tariff war that was unleashed by Trump administration has not been terminated, only a temporary truce has been declared to allow America's trading partners to comply with the trade policy that is dear to the heart of Trump. Following the tirade against multilateral trade and the slapping of huge tariffs on exports from the European Union (EU) and China, Trump administration has been conducting trade negotiations to exact favourable terms from the trading partners. As a reposte to the present global trading regime based on multilateralism America is having bilateral negotiation to reshape the global trading regime. Like the Damocles' sword the threat of a new set of tariff is now hanging over China and the EU in case they fail to oblige American administration in respect of trading terms.

The 'America First' policy of Trump Administration has not only got its principal trading partners in the crosshairs, even the giants of American corporate world have been targeted to make them fall in line with the new trading and investment strategy. To complement its trade policy the Trump Administration has already revamped the fiscal policy through drastic deduction of taxes, particularly on business and industries. In tandem with expansionary fiscal policy, Trump Administration wants the Federal Reserve Bank (Fed) to formulate an easy monetary policy, capping basic interest and even to resume quantitative easing (QE) for the benefit of companies who are too big to fall. The Fed has refused so far to oblige President Trump; but with two new Trump nominees as governors, the Fed is likely to become a handmaid of Trump's grand design to reshape the economic landscape conducive to his 'America First' policy.

Much depends on how the ongoing trade negotiation with China ends up. If America finally succeeds in having a more open Chinese market for its goods and American investment allowing China to avoid drastic policy changes, particularly withdrawal of subsidy in the public sector, it may not be more than a Pyrrhic victory. The inherent cause for running a deficit with China will continue, as long as China remains a cheaper producer of goods that are in competition with America. However, a mutual agreement between American and China on the basis of give and take will save the global trading regime from a massive quake and a tectonic shift, unhinging economies across the globe. But the Chinese juggernaut will secure permanent advantage over all trading partners with its subsidised growth.

It is, therefore, not only America that has reason to be unhappy with China for its unfair trade practices. According to recent news, top EU leaders met Chinese Premier Li Keqiang at a summit at Brussels recently to hammer out a more equitable trading regime. China has so far shown little interest to listen to longstanding complaints from EU about industrial subsidies and limited access to its market, the same ones flagged by America. The European Commission issued a 10-point plan proposing a more balanced relationship with Beijing, labelling China as a `systemic rival'. But while EU's 15 trillion euro market gives it significant economic clout, it struggles to maintain unity among its 28 members on issues of foreign policy allowing China to pursue one-to-one deals with individual countries. The most striking example of this came last month when Italy became the first G-7 nation to sign up to China's Belt and Road initiative.

The tension and uncertainty over global trade has already started taking its toll on the GDP growth of major economies. The US growth rate, though in the rebound, is rising at a snail's pace of 2.0 per cent. Though it was gleefully announced by Trump Administration that the growth rate has exceeded over 3.0 per cent, experts are pointed out that it is a fake growth based on lower imports and building up of inventories. Given the continuing deficit in balance of payments, America is likely to remain mired with an anemic growth rate till it improves its productivity and competitiveness.

China, the second biggest economy in the world, has now settled for a growth rate of above 6.0 per cent, slipping down from above 7.0 per cent during the last 10 years.

As regards the EU, European Central Bank (ECB) projection indicates euro zone growth was just above .02 per cent in the first three months in the year and it is not likely to show significant improvement any time soon.

Japan, another major player in world economy, is struggling with its monetary policy to revive the sluggish economy with stimulus measures. It has not yet come under the punitive tariff measures from America, which has given it a reprieve for the time being.

Though global trade has in the past exceeded economic growth, tension and uncertainty over trade has now threatened to reverse the trend which will mean even a lower growth of national GDP's of the major economies. Policy makers from the Group of 20 are worried that weakness in key economies could feed into each other fuelling a downward spiral of global growth rate. In the last joint meeting of the World Bank and the International Monetary Fund (IMF) many of the participants felt that self-inflicted wounds from protectionist trade policies were to blame for the slow growth of world GDP. Another downgrade of global growth estimates was made by IMF coinciding with the joint meeting that led many delegates to make out a strong  case for rules-based multilateral trade to oversee and rejuvenate the world economy.

It is obvious that global trade, which has acted as the engine of growth, has no substitute. The rules-based trading system may need fixing because of misuse by some countries and the World Trade Organisation (WTO) is the best forum to carry out necessary reforms. Fixation with bilateral trade, as shown by Trump Administration, is not the solution. What is more worrying, it can upend the global trading system in a manner that would be worse than trying to sit up Humpty Dumpty.


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