SINGAPORE (July 19): Just the day before The Edge Singapore’s 2018 mid-year investment forum took
SINGAPORE (July 9): Everybody loses in a trade war, says Nouriel Roubini, professor of economics at New York University’s Stern School of Business. Roubini, who has worked at the International Monetary Fund, US Federal Reserve and World Bank, adds that the withdrawal of the US from trade pacts in Asia effectively removes its influence from the region and forces countries towards China.
The Edge Singapore managed to obtain his views on this hot topic on the sidelines of the Amundi World Investment Forum 2018 conference in Paris on June 28 and 29.
How does the rise of protectionism impact growth?
There’s been a populist backlash, against globalisation, against free trade, migration, various forms of capital mobility including foreign direct investment (FDI); nationalism against supranational authorities. Some of that backlash is explained by the fact that globalisation and tech innovation have been good for the world overall, [but] there have been winners and losers. Those that are being left behind say this is unfair. They vote for populist parties, either for the right or left — [US President Donald] Trump in the US, Brexit, Italian populism.
If these trends were to continue, we [would] see a slowdown in economic growth globally. If you impose trade barriers, there is retaliation. And if there is retaliation, it is a negative-sum game, where everyone [will lose]. In the US, Europe and Japan, where there are ageing populations, some degree of migration is beneficial. Potential growth depends on the increase in labour supply, and not [allowing migration] implies that economic growth will be lower. If you restrict FDI for political or other reasons, capital is not going to flow into that region, and it is going to reduce potential growth.
Supply chains are now global and can be disrupted in one way or another. The extent of the economic damage depends on how severe restrictions are on trade in goods and services, on labour and capital. Eventually, restrictions in trade, in technology, in information will occur. There is a risk that the world may become slightly less globalised or de-globalised. So, there is a Balkanisation of global economic activity. That Balkanisation is not going to be [good] for global growth.
How severe could trade restrictions become?
I do fear that the policies of the Trump administration are leading us to a trade war. Some people believe that it was not a deal but a negotiating ploy — playing tough with trade partners. But it looks like Nafta (North American Free Trade Agreement) is now dead on arrival. In Europe, the tariffs on steel and aluminium are only the beginning. There is a serious risk that the US will impose tariffs on imports of European or Japanese cars. The European Union will have to retaliate.
In the case of China, the frictions are going to be worse because it is not just the trading of goods but also the jobs and incomes of white- and blue-collar workers that Trump is worried about. There is the fear that China is going to take over the world, stealing the industries of the future. Some Americans believe that what China is doing is not just an economic threat but [also a threat to] the national security of the US. In my view, the conflicts regarding trade are going to escalate to technology, to intellectual property rights, to foreign investment. Things are going to get worse.
What impact do the trade tariffs have on consumption, investments and fiscal spending?
The direct effects of a trade war are amplified by global supply chains. [Countries in] Asia produce goods that are exported to China and assembled there. The final goods are exported to the US. That’s why when these fears about a trade war escalated in the last few weeks, the impact wasn’t only felt in Chinese equity markets but also throughout Asia. This can have a negative impact on both business and consumer confidence. You are restricting global supply chains, creating uncertainties about what business can be done globally. Therefore, capital spending may be negatively affected; FDI too.
If protectionism rises, prices of imported goods will rise. Many of them are consumer goods, bought by the poorest people in the US or other parts of the world, and this reduces the disposable income of their household. There could be a significant tightening of financial conditions through equity markets.
How will the trade war escalate?
It’s not just trade. The Chinese could start [punishing] US firms that do business in China, like what it did to Korean and Japanese companies. Then they [will] use their currency tool. The [renminbi] has been weakening, and they [will] let the currency depreciate. The US [will impose] more restrictions. That becomes a war on FDI, restrictions on tech transfer and joint ventures.
The US is using extraterritoriality to say, “If you continue to do business with North Korea, Russia and Iran [on which the US has sanctions], I’m going to punish you.” You saw the threat when it shut down ZTE Corp. That could happen to other Chinese firms. Then there is the “nuclear” option that China has: the dumping of some of its holdings in US Treasuries. These are the elements of such wars. They are not just tariffs and trade. They could escalate [into] so much more.
Are we in danger of a recession?
I do not predict a recession anytime soon. But there are moments of fragility. After the global financial crisis, private and public debt did not go down, but [rose]. What maintained the system’s resilience was zero [interest rate] policy, or quantitative easing, reducing long-term interest rates. While debt ratios are high, the servicing ratio is low. But now, we have a [gradual] exit by the [Fed], and eventually the European Central Bank, Bank of Japan and other central banks, from these zero interest rate policies. Therefore, liquidity conditions are going to tighten; short- and long-term rates [will be] going higher.
The system has a lot of public and private debt, and many asset prices are artificially boosted by central bank action, with low interest rates and [control of] volatility. Then you have some frothiness in the financial markets. That can be deflated. [The trade wars], some of the specific problems that some emerging markets [as well as] advanced economies have, the political and policy changes in Italy — all these create an environment that is somewhat more fragile, one in which shocks can lead to economic and financial strains.
By 2020, we could be in a world where trade tensions are more serious, where some of the political problems in Italy or parts of Europe are more serious. Or maybe the pickup in inflation in the US forces it to hike [interest rates] even faster. In a world where some emerging markets and developed markets have high public and private debts, the central banks have started to normalise. So, by 2020, the world looks more fragile. If there were a severe trade war in the US [with its trading partners] — and it becomes a real trade war that escalates with retaliation — at some point, the market reaction is not going to be a correction but a bear market. The impact on business and consumer confidence will be [significant].
The disruption to the global supply chain and trade channels will be [significant]. They will feed on each other. That will be a tipping point, where the current expansion will slow down. The slowdown becomes a stall to global growth. Then the world becomes more fragile to the risk of an economic downturn.
Do you think the US president knows what he is doing?
Trump is unpredictable and uncertain. The world needs a certain level of predictability, [whereas] he can always surprise you with his policies. Every country in the world should be concerned about its national interest. But [it’s different] when you are the leading country in the world, and there is broad peace, prosperity and stability, security, free trade, free capital mobility, and you are one of the anchors of this system.
Now, when you say “make America great again”, then you say “America First”, or “Hire America, buy America”, you start to push out foreigners, attack allies, attack potential enemies such as Russia. You actually act in a way that is irresponsible. You are creating a lot of elements of uncertainty, unpredictability and disrupting the global economic [system] that has been highly beneficial for the US and its allies. You are really creating noise and uncertainty, which eventually can be dangerous.
I’m not sure if there is a full coherence to what Trump is doing. I give you one example. China is rising. The US wants to maintain some of its primacy in Asia, trade- and security- wise. Now, under [former US president Barack] Obama, we wanted to maintain the important role of the US in Asia, as China is rising; therefore, we were going to do a pivot to Asia. That couldn’t be just sending troops to Australia. There had to be an economic act, so that Asean countries, Japan and others that want to be close to the US [would] stay in the economic sphere of the US. What was the economic pillar of this [plan]? The Trans-Pacific Partnership (TPP). That was how the US managed the rise of China. We built financial trade and economic relations with the Pacific and Asian camps.
Trump comes to power. He wants to maintain the hegemony of the US in Asia, but the first thing he does is get out of the TPP. That means in a world where China is already [spearheading] the New Development Bank, Asian Infrastructure Investment Bank, Belt and Road Initiative and Regional Comprehensive Economic Partnership, he is essentially saying, “We don’t have any economic pillar [in relation to] maintaining our primacy in Asia, and we are giving all of Asia to China.” [Asian countries] want to be in good economic and strategic relations with the US and China, but the US is missing in action. Therefore, these countries are going to naturally, gradually and grudgingly pivot towards China.