May 23rd 2018

A Bilateral Foil for America’s Multilateral Dilemma

by Stephen S. Roach

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of a new book Unbalanced: The Codependency of America and China.

 

 

NEW HAVEN – The good news is that the United States and China appear to have backed away from the precipice of a trade war. While vague in detail, a May 19 agreement defuses tension and commits to further negotiation. The bad news is that the framework of negotiations is flawed: A deal with any one country will do little to resolve America’s fundamental economic imbalances that have arisen in an interconnected world.

There is a longstanding disconnect between bilateral and multilateral approaches to international economic problems. In May 1930, some 1,028 of America’s leading academic economists wrote a public letter to US President Herbert Hoover urging him to veto the pending Smoot-Hawley tariff bill. Hoover ignored the advice, and the global trade war that followed made a garden-variety depression “great.” President Donald Trump has put a comparable spin on what it takes to “make America great again.”

Politicians have long favored the bilateral perspective, because it simplifies blame: you “solve” problems by targeting a specific country. By contrast, the multilateral approach appeals to most economists, because it stresses the balance-of-payments distortions that arise from mismatches between saving and investment. This contrast between the simple and the complex is an obvious and important reason why economists often lose public debates. The dismal science has never been known for clarity.

Such is the case with the US-China debate. China is an easy political target. After all, it accounted for 46% of America’s colossal $800 billion merchandise trade gap in 2017. Moreover, China has been charged with egregious violations of international rules, ranging from allegations of currency manipulation and state-subsidized dumping of excess capacity to cyber-hacking and forced technology transfer.

Equally significant, China has lost the battle in the arena of public opinion – chastised by Western policymakers, a few high-profile academics, and others for having failed to live up to the grand bargain struck in 2001, when the country was admitted to the World Trade Organization. A recent article in Foreign Affairs by two senior officials in the Obama administration says it all: “(T)he liberal international order has failed to lure or bind China as powerfully as expected.” As is the case with North Korea, Syria, and Iran, strategic patience has given way to impatience, with the nationalistic Trump administration leading the charge against China.

The counter-argument from multilateral-focused economists like me rings hollow in this climate. Tracing outsize current-account and trade deficits to an extraordinary shortfall of US domestic saving – just 1.3% of national income in the fourth quarter of 2017 – counts for little in the arena of popular opinion. Likewise, it doesn’t help when we emphasize that China is merely a large piece of a much bigger multilateral problem: the US had bilateral merchandise trade deficits with 102 countries in 2017. Nor does it matter when we point out that correcting for supply-chain distortions – caused by inputs from other countries that enter into Chinese assembly platforms – would reduce the bilateral US-China trade imbalance by 35-40%.

Flawed as it may be, the bilateral political case argument resonates in a US where there is enormous pressure to ease the angst of the country’s beleaguered middle class. Trade deficits, goes the argument, lead to job losses and wage compression. And, with the merchandise trade gap hitting 4.2% of GDP in 2017, these pressures have only intensified in the current economic recovery. As a result, targeting China has enormous political appeal.

So, what can be made of the May 19 deal? Beyond a ceasefire in tit-for-tat tariffs, there are few real benefits. US negotiators are fixated on targeted reductions of around $200 billion in the bilateral trade imbalance over a two-year time frame. Given the extent of America’s multilateral problem, this is largely a meaningless objective, especially in light of the massive and ill-timed tax cuts and federal expenditure increases that the US has enacted in the last six months.

Indeed, with budget deficits likely to widen, America’s saving shortfall will only deepen in the years ahead. That points to rising balance-of-payments and multilateral trade deficits, which are impossible to resolve through targeted bilateral actions against a single country.

Chinese negotiators are more circumspect, resisting numerical deficit targets but committing to the joint objective of “effective measures to substantially reduce” the bilateral imbalance with the US. China’s vague promise to purchase more American-made agricultural and energy products borrows a page from the “shopping list” approach of its earlier trade missions to the US. Unfortunately, the big-wallet mindset of a deal-hungry China reinforces the US narrative that China is guilty as charged.

Even if the stars were in perfect alignment and the US was not facing a saving constraint, it stretches credibility to seek a formulaic bilateral solution to America’s multilateral problem. Since 2000, the largest annual reduction in the US-China merchandise trade imbalance amounted to $41 billion, and that occurred in 2009, during the depths of the Great Recession. The goal of achieving back-to-back annual reductions totaling more than double that magnitude is sheer fantasy.

In the end, any effort to impose a bilateral solution on a multilateral problem will backfire, with ominous consequences for American consumers. Without addressing the shortfall in domestic saving, the bilateral fix simply moves the deficit from one economy to others.

Therein lies the cruelest twist of all. China is America’s low-cost provider of imported consumer goods. The Trump deal would shift the Chinese piece of America’s multilateral imbalance to higher-cost imports from elsewhere – the functional equivalent of a tax hike on American families. As Hoover’s ghost might ask, what’s so great about that?


Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

Copyright: Project Syndicate, 2018.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Apr 17th 2019
On the night of April 15, 2019, in Paris, the emotions were raw. “Notre Dame is burning, the whole of France is crying, the whole world is crying,” said Archbishop Michel Aupetit of Paris. “It’s terrible, frightening, painful, a tragedy, a nightmare.” “This place leaves no one untouched. When you enter this cathedral, it inhabits you,” said Anne Hidalgo, the Mayor of Paris, in front of the burning monument. “We will rebuild,” said the Rector of Notre Dame, “we will rebuild.”
Apr 15th 2019
High-level political purges are gathering pace in Russia. The latest evidence came in late March, with the arrests of Mikhail Abyzov, a former minister for open government affairs, and – two days later – Viktor Ishayev, a former Far East minister and ex-governor of Russia’s Khabarovsk region. Unsurprisingly, the arrests of such senior figures is having a chilling effect among the country’s elites. The authorities have now arrested or imprisoned three former federal government ministers and a supporting cast of regional officials
Apr 8th 2019
The reaction to this type of paternalism, sensible and well-meant as it usually was, came in the form of petulant populism. Like a child who refuses to eat his spinach, just because his mother claims it is good for him, supporters of Trump, Brexiteers, or Baudet want to give the finger to the politics of virtue. That is why Nigel Farage, the chief promoter of Brexit, likes to be photographed with a glass full of beer and a smoldering cigarette: if the virtuous elite want us to drink less and quit smoking, let’s have another and light up.
Apr 8th 2019
Chinese President Xi Jinping seems to be on a roll. He has sent a rocket to the dark side of the moon, built artificial islands on contested reefs in the South China Sea, and recently enticed Italy to break ranks with its European partners and sign on to China’s Belt and Road Initiative. Meanwhile, US President Donald Trump’s unilateralist posture has reduced America’s soft power and influence. China’s economic performance over the past four decades has been truly impressive. It is now the main trading partner for more than a hundred countries compared to about half that number for the United States. Its economic growth has slowed, but its official 6% annual rate is more than twice the American rate. Conventional wisdom projects that China’s economy will surpass that of the US in size in the coming decade. Perhaps. But it is also possible that Xi has feet of clay.
Apr 2nd 2019
"......as prime minister, May called a snap election in the name of helping her deliver Brexit. She openly dismissed anyone opposing Brexit – which at the very least meant the 16.5m who had voted remain – as “playing games with politics”. In hock to the hardline Brexiteers within her own party, May pushed a for a version of Brexit that would make this small group of around 100 or so individuals happy, regardless of what millions out in the country thought."
Apr 1st 2019
The financial crisis occurred in 2008 because deficient regulation allowed huge risks to develop within the financial system itself. But the depth of the subsequent recession, and the long period of slow growth that followed, was the result not of continued financial system fragility, but of the excessive leverage in the real economy that had developed over the previous half-century. Between 1950 and 2007, advanced economies’ private-sector debt (households and companies) grew from 50% to 170% of GDP and adequate growth seemed attainable only if debt grew far more rapidly than nominal GDP. After the crisis, loan growth turned negative and remained depressed for many years, not because an impaired financial system lacked the capital to extend credit, but because overleveraged households and companies were determined to pay down debt even if interest rates were zero. The same pattern was observed in Japan in the 1990s.
Mar 28th 2019
The American people should have known that something was awry when President Donald Trump’s attorney general, William Barr, announced on Friday, March 22, that he had received special counsel Robert Mueller’s report and would provide a summary of its findings to certain congressional leaders over the weekend. We should have asked: Why Barr’s summary and not Mueller’s? Presumably, Mueller had attached one to his report. It turned out there was a propagandistic reason for this unusual arrangement: Barr issued the best possible interpretation of Mueller’s report – from the president’s standpoint – including perhaps even a twist on what Mueller had said and intended. This allowed the president and his backers to propagate and celebrate what Mueller didn’t say: that the report’s conclusions were a “total exoneration” of Trump. In fact, even Barr’s brief summary, quoting Mueller’s report, said, “While this report does not conclude that the President committed a crime, it also does not exonerate him.”
Mar 26th 2019
"The 2020 campaign could easily devolve into street violence at Trump’s instigation."
Mar 26th 2019


 

BEIJING – The global economy is weakening, in no small measure because of a deep, widespread sense of uncertainty. And a major source of that uncertainty is the ongoing Sino-American “trade war.”

Mar 19th 2019
Last week, a far-right extremist killed at least 50 people – including a three-year-old child – worshiping at two mosques in the New Zealand city of Christchurch. Neither white supremacy, nor racially motivated terrorist attacks carried out in its name, are new phenomena. Yet the response to far-right terrorism remains thoroughly insufficient.
Mar 12th 2019
Allegations of Russian meddling in the affairs of Western countries have been a persistent feature of Western politics since the Cold War. Claims of Russian interference in the 2016 US presidential election are only the most recent in a long series of suspected conspiracies across the past century or so. But Russian political discourse is also riddled with conspiracy theories. Everything bad that happens in Russia is traced back by some to one or another anti-Russian plot hatched in the West.
Mar 10th 2019
My Soviet school built a mesh fence around its yard. Every week, tardy kids who wanted to cut through the yard tore a hole in the fence. Every weekend, the administration fixed it. But the hole would reappear the morning after. This went on forever. I wish US President Donald Trump, the fence builder of the West, had gone to my school. The Soviet Union was a country of fences, barriers, and walls. Everything was prohibited, locked, and guarded. Warning signs were phrased in no uncertain terms: “Do Not Enter: Death!” “Strangers Are Forbidden.” “The Border Is Closed.” Barriers didn’t stop people from ignoring the warnings. But they complicated things.
Mar 8th 2019

 

WASHINGTON, DC – It seems that every time I write about Donald Trump’s presidency, I pronounce it to be in more trouble than ever. This time is no different: he and his presidency are indeed in more trouble than ever. And yet that may not prevent him from winning again in 2020.

Mar 7th 2019
The Brexit process has exacerbated many of the disunities within the UK’s territorial constitution................polling in England suggests that many people think breaking up the UK is perhaps a price worth paying to deliver Brexit.......... At the referendum, only two of the four component parts of the UK – England and Wales – voted to leave the EU. This was enough to swing an overall UK-wide majority in favour of leave, but it went against the will of the Scottish and Northern Irish electorate. In both these parts of the country, significant majorities voted to remain – 62% and 55.8%, respectively.
Mar 6th 2019
Watching Michael D. Cohen, US President Donald Trump’s former lawyer and self-described “fixer,” testify to the House Committee on Oversight and Reform was a remarkable spectacle to behold. Here was a man who was hired by Trump to behave like a gangster. And he did that to perfection. When The Daily Beast was about to report on allegations by Trump’s first wife, Ivana, that her husband had raped her, Cohen barked at the journalist working on the story: “So I’m warning you, tread very fucking lightly, because what I’m going to do to you is going to be fucking disgusting. You understand me?” That journalist was hardly alone. Cohen’s job was to threaten anyone who got in the way of his old boss. He lied to congressional committees, paid off prostitutes to stop them from talking about their affairs with Trump, and much else. Cohen, who will soon begin serving a three-year prison sentence, has become what Mafiosi (and Trump) call a “rat.”
Feb 27th 2019
Extracts: "Some political catastrophes come without warning. Others are long foretold, but governments still walk open-eyed into disaster. As the possibility of a no-deal Brexit looms, most analysts agree that there will be severe economic and political consequences for the UK and the EU. And yet a no-deal Brexit still remains an option on the table....." ".......Although the consequences of a no-deal Brexit will be much less terrible, there are similarities in certain patterns of thinking and political behaviour, from the few who embrace disaster to the systemic pressures which prevent compromise. Avoiding disaster in 1914 would have required framing the stakes of the July crisis in less zero-sum ways and refusing to rationalise a general European war as an acceptable policy option. It required leaders with enough courage to compromise, even to accept defeat, and for states to offer rivals the prospect of long-term security and future gains in exchange for accepting short-term setbacks."
Feb 25th 2019
US President Donald Trump’s administration has underestimated China’s resilience and strategic resolve. With the Chinese economy slowing, the US believes that China is hurting and desperate for an end to the trade war. But with ample policy space to address the current slowdown, China’s leadership has no need to abandon its longer-term strategy. While a cosmetic deal focused on bilateral trade appears to be in the offing, the sharp contrast between the two economies’ fundamental underpinnings points to a very different verdict regarding who has the upper hand.
Feb 21st 2019
Extracts: "......after three years of referendum-induced turmoil, there is finally a new move, a brave move, by the eight Labour MPs and three Conservative MPs (and counting)......There are no policy announcements, no real statement of principles, and there is no leader or political platform. And yet, this policy-free political movement is of incredible political importance........this is an act of direct action, based on the concept of prefiguration. That is, the actual policy statement at the heart of the formation of this movement is the formation of the movement itself. There is no need for grand policy statements right now."
Feb 21st 2019
There is a fascinating chapter toward the end of Alexis de Toqueville’s Democracy in America titled “What Kind of Despotism Do Democratic Nations Have to Fear?” in which the author attempted something truly extraordinary – to describe a social condition which humankind had never before encountered. We find him trying to put his finger on something which does not yet exist, but which – in his extraordinary political imagination – he was able to foresee with startling clarity.
Feb 20th 2019
From Trump’s very inauguration day speech, written for him by the fascist gadfly Steve Bannon and man still without a prom date Stephen Miller, it was apparent that the 45th president was a constitutional crisis waiting to happen. And now, without our realizing it for the most part, the constitutional crisis is here.