Bi Jiyao

Changes in the Global Economy and New Uncertainties

Bi Jiyao

The election of Donald Trump as President of the United States is another major event following the United Kingdom’s exit from the European Union, and indicates that the deep repercussions of international financial crisis are spreading into the social and political realm. Populism, anti-globalization, and protectionism will dominate the future policy trend of the United States and Europe. Trump’s election victory initially triggered a slump in the US stock market, a fall of the dollar and a rise in the price of gold, but it was soon replaced by sustained appreciation of the dollar, with three major US indexes hitting a record high. This suggests that the international market is starting to envision a positive impact from Trump’s economic policy. Various signs show that after eight years’ of profound readjustment, the world economy is looking forward to a period of further readjustment and change.

Major Content of Trump’s Economic Policy

Trump’s economic policy domestically focuses on cutting taxes, slashing welfare benefits and revitalizing the real economy, and his foreign economic policy attaches importance to trade protection, and constructing favorable bilateral economic and trade relations for the United States. The main points in the program include the following:

Fiscal policy.First, cutting taxes. Trump considers the United States tax law as too complicated, and supports simplifying the tax system and easing the tax burden, by reducing the personal income tax brackets from seven to three, with rates of 10 percent, 25 percent and 35 percent respectively; simplifying tax forms; and slashing the top business tax rate from 35 percent to 15 percent. Second, reviving infrastructure investment. Trump plans to invest $550 billion in infrastructure over ten years, stepping up efforts on infrastructure development of roads, airports and energy, and prioritizing use of domestically made products to drive economic growth. In addition, Trump intends to repeal Obama’s healthcare reform bill.

Industrial policy.Considering that the Wall Street Reform and Consumer Protection Act introduced by Obama has led to soaring costs of supervision of the financial system, Trump advocates relaxing control and promoting financial liberalization. Trump has announced that he wants to lift the restrictions on the production and export of shale gas, oil, natural gas and clean coal. He also requires federal agencies to cut two existing regulations for every new regulation they implement. Trump plans to reduce the income tax rate on repatriation of overseas profits by transnational enterprises from 35 percent to 10 percent, and proposes to improve the business environment in the United States, in order to attract manufacturing back to the US and expand investment of transnational enterprises in the US.

Trade policy.In Trump’s perspective, the current free trade system has had a negative impact on the United States’ economic development and overall employment situation. Given this, Trump and his staff say they will substantially adjust the US trade policy, including exiting the Trans-Pacific Partnership (TPP), renegotiating or terminating the North American Free Trade Agreement (NAFTA), listing major trading partners such as China and Mexico as currency manipulators and imposing a punitive 45 percent tariff on them, and ending all kinds of “unfair trade” to construct “fairer”bilateral economic and trade relations.

Chinese Premier Li Keqiang talks with business leaders on China’s economic reform,“Made in China 2025” and trade facilitation at the 2017 Summer Davos Forum in Dalian on June 28, 2017.

Interest rate policy.Trump has been ambivalent in his views on interest rate policy. While he accuses the Federal Reserve of manipulating low interest rates, he also states that raising interest rates would create a terrible prospect, and even proposes to replace Chairwoman of the Federal Reserve Janet Yellen. Strictly speaking, Trump has yet to come up with any clear position on interest rates.

Implications of Trump’s Policy for the Global Economy

Trump’s economic policy covers a wide range of areas, and necessitates adjustment on the part of many parties. The shape of the ultimate policy might more or less be “discounted,” but it will still have significant implications for the world economic architecture.

Recovering sluggish growth of the global economy

Since the financial crisis, the recovery of the world economy has been sluggish, the pace erratic, and trade and investment remains at a depressed level. Recently, however, there have been signs of improvement. In the third quarter of 2016, the United States’ economy increased strongly by 3.2 percent, the unemployment rate dropped to 4.6 percent, while inflation expectations rose. The eurozone economy continued a mild recovery, and the quarterly year-on-year growth rate remained steady at around 1.6 to 1.7 percent. The emerging economies tended to stabilize, with Russia and Brazil expected to step out of recession. The global stock market went up amid wild oscillation, and prices of bulk commodity rose significantly again.

Looking at the trend, the world economy is still in a period of major adjustment in the post-crisis era, with each economy exerting great efforts to restructure and gather momentum for future economic growth. It is difficult therefore in the short term for the world economy to emerge from the present state of slow growth.. Trump’s so-called “America first” policies of tax reduction, expanded investment in infrastructure development, and relaxed financial regulation may consolidate the strong recovery tendency of the US economy, and change the picture of slow growth of the world economy.

Increasing fluctuations of the international financial market

Because of the differentiating trend of the global economy and inconsistent economic cycles among countries, the monetary policies of major economies began to diverge and even deviated sharply from one another. Since 2015, the Federal Reserve has twice increased interest rates.But the European Central Bank and the Bank of Japan have continued to purchase debt on a large scale, and adopted negative interest rates while maintaining quantitative easing.

Because of market expectations that Trump’s tax reduction and expenditure increase policies would increase the fiscal deficit, the circulation of Treasury securities will continue to expand in the future and the rate of return on Treasury bills may possibly keep on climbing. Impacted by the strong dollar and the increased rate of return on US Treasury securities, other non-dollar currencies will continue to bear the pressure and international capital may flow at an accelerating rate back to the United States. Adjustments and fluctuations may further intensify in global foreign exchange, debt, stock and bulk commodity markets as well as in international flow of capital.

Impacting regional cooperation and multilateral trade regime

Trump declares to pursue an “America First” foreign economic and trade policy. He thinks that the current trade system is “unfair” mainly in two respects: on one hand, the United States’ tariff level is far lower than that of its major trading partners; on the other hand, the US can hardly constrain countries like China and Mexico in using “unfair” industrial, environmental and labor policies to boost export. Trump’s emphasis on building “fair” bilateral economic and trade relations essentially focuses on measures of trade protectionism, to attract industrial and employment opportunities back to the United States. This will certainly trigger frequent trade frictions or even trade war, and bring great uncertainties to the global trade and investment environment.

Trump has signed a presidential memorandum shortly after he was inaugurated to withdraw the United States from the TPP, while themultilateral trade agreement with a clear-cut “Obama-Hillary” label has yet to take effect pending ratification in most signatories. Having said that, the US is unlikely to abandon its “card” of high-standard economic and trade rules, as this is where the United States’ own competitive advantages lie. It can also be used to contain development of the emerging major powers and consolidate the US leadership in global governance. Therefore, in the foreseeable future, the United States is still likely to promote the set of TPP rules in various forms in bilateral, multilateral and other fields. This will directly impact the process of regional cooperation and the rules of the multilateral trade regime, and run counter to building an open system of world economy and boosting economic globalization.

Reshaping global industrial landscape

The recent years have witnessed accelerated development of emerging industries including the global mobile internet, renewable energy, the Internet of Things, 3D printing, and intelligent manufacturing, while information technologies like mobile internet, cloud computing and big data are being popularized, applied and integrated in a wider range of fields including finance, trade and business, manufacturing, education and medical treatment. It will ceaselessly breed new business formats, models and industries, and traditional industries will undergo comprehensive transformation and upgrades. While global industries are speeding up restructuring, a new pattern of production featuring informatization, intellectualization, miniaturization, decentralization and personalization will gradually replace the traditional organization of large factory manufacturing characterized by clear division of labor and standardized production, and eventually become the norm. The international division of labor will face tremendous changes.

While protecting the US market and employment using high punitive tariffs, Trump also claims to simplify the personal income tax system and sharply reduce tax rates, to attract more industrial and employment opportunities back to the US. This is not only a continuation of the Obama administration’s policy of revitalizing domestic manufacturing, but also represents strengthened measures with a protectionist hue, perhaps setting an example for Europe and Japan. In fact, Japan and Britain are considering significant business tax reductions. Therefore, the global industrial and value chains may encounter considerable adjustments, and developing economies would face even more intense competition in attracting foreign capital and industrial transfer.

An External Environment More Complicated and Volatile

After the international financial crisis, the external environment for China’s development has already undergone profound changes. Under the Trump administration, the US domestic and foreign policies and the world economy will be confronting a new situation, and China’s external environment may become more complicated with increasing uncertainties.

Improved overseas market demand.Since Trump’s election victory, the US macro-economic policy has been expected by the market to undergo significant changes. Trump’s promises on infrastructure investment and tax reduction are anticipated to drive domestic demand, spur investment, boost import, and stimulate the US and global economic growth. According to forecasts by the International Monetary Fund (IMF), in 2017 the global economy and the world’s trade volume will increase by 3.4 percent and 3.8 percent respectively, 0.3 and 1.9 percentage points higher than last year. In 2018, these two indicators are estimated to increase 3.6 percent and 4.1 percent respectively, the fastest growth rate since 2011. In addition, developed and emerging economies will achieve growth rates of 1.9 percent and 4.5 percent respectively in 2017, 0.3 and 0.4 percentage points higher than last year, and the US economy will rise by 2.3 percent, a year-on-year0.7 percentage points’ increase.

Pressure on renminbi depreciation and capital outflow.There is no medium or long-term basis for the depreciation of the renminbi, which is still showing characteristics of a stable hard currency in the global monetary system. However, as the United States’ economic growth speeds up, inflation grows, the Federal Reserve increases interest rates, the rate of return on US Treasury securities rises, and global currencies generally depreciate against the dollar, there will be expectation of, and pressure exerted, to devalue the renminbi, with resulting capital outflows. Despite uncertainties in the trend of the dollar, consistent pressures on the renminbi’s exchange rate and on capital outflow can be caused by factors including an accelerated return of international capital to the US, China’s expedited pace of outbound investment, and a declining rate of return on domestic investment.

More trade protectionist measures from the US.During his election campaign, Trump accused China of adopting unfair trade policies which stole employment opportunities from workers of the United States. He threatened to list China as a currency manipulator and place a 45 percent punitive tariff on China’s exported goods to the US. Although Trump has significantly toned down his statements after taking office, it is still likely that more protectionist measures would be adopted against products exported from China in the name of anti-dumping, countervailing, and safety assurance, and thus China-US trade frictions would probably increase. While withdrawing from the TPP, Trump has claimed he would build a socalled fair bilateral economic and trade relationship, which would introduce new uncertainties to the future development of China-US economic and trade relations.

New opportunities for Asia-Pacific regional cooperation.Trump’s announcement to withdraw from the TPP temporarily eases the pressure onChina caused by the United States’ implementation of a high standard free trade zone in the Asia-Pacific region, and presents a critical opportunity for China to boost the Regional Comprehensive Economic Partnership (RCEP) negotiations and build a Free Trade Area in the Asia-Pacific (FTAAP). At the same time, one should be clear that the general trend is toward raising standards for trade and investment liberalization and integrating new issues into free trade agreement negotiations. The US is unlikely to abandon its leadership role in making rules for international economy and trade, and these temporary tactical adjustments may well eventually further consolidate its powerful leadership in global governance.

Keep Focused and Respond Calmly

Faced with changes in the global economy, China has to keep its strategic focus, plan ahead, and respond effectively. China should give full play to its ever growing comprehensive strength and international influence, actively shape a favorable external environment for development, and conscientiously safeguard China’s economic security and development interests.

Domestically, China should take the initiative to adapt to the new normal of economic development, deepening supply-side structural reform while moderately expanding aggregate demand, and building capacities against economic risks. In particular, China should reinforce the trend of economic development that is mainly driven by domestic demand, and in international affairs focus on further opening up, holding high the banner of economic globalization and actively opening up the fields of finance, professional services and manufacturing. While attracting foreign investment and expanding imports, China should steadily promote the Belt and Road construction and international cooperation in industrial capacity, deepen bilateral and multilateral economic and trade relations, boost development of an open system of the global economy, and take the lead in the transformation of global governance.

Bi Jiyao is Senior Research Fellow and Director of the Institute for International Economic Research, Academy of Macroeconomic Research of China’s National Development and Reform Commission (NDRC).