Peer reviewed analysis from world leading experts

China's economic policy choices narrow

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Investors chat in front of an electronic board showing stock information at a brokerage house in Beijing (Photo: Reuters/Li Sanxian).

In Brief

As we wake to the beginning of a new year, the word that most aptly describes the world we face this year is uncertainty.

The old certainties that brought prosperity and a significant measure of stability to world affairs for over three-quarters of a century after the Second World War are under threat.


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The US anchor of the western security system on which order in Asia and the Pacific has relied is being weighed and who knows where President-elect Donald Trump is taking the US ship of state.

More disturbingly, the whole institutional edifice on which the economic certainty and political confidence in the US-led global order has been built — the postwar institutional framework that guaranteed economic openness and the prospect of economic and political security — is up for grabs. There are few in security circles around our region that appreciate what this will do to the global security outlook. There is no preparation for it. There is no coherent or rational discussion of it.

Isn’t ‘uncertainty’ the wrong word, you might ask? Security advisers in Tokyo and Canberra, for sure, and probably in Beijing and Jakarta too, are urging leaders to pause to consider the continuities and the softer edges of the scene that might emerge around the US presidency. There is a palpable air of disbelief that Trump could actually do what he says he will do.

Pressing pause is not a policy option. The speed of developments is overtaking sound judgement and mad, bad and dangerous policies will exclude the opportunity for half-good policy outcomes. If there is to be effective pushback against the threats to the order that has provided prosperity and stability in Asia and the Pacific, articulation of alternative strategy is urgent.

What’s the problem?

Trump’s economic election campaign mantra was organised around his war on free international trade. Hillary Clinton joined the game too, of course, but for Trump the anti-trade rhetoric is different. For him and his advisers, Wilbur Ross (now Commerce Secretary designate) and Peter Navarro (now head of the new White House Trade Council designate) trade is central to all the United States’ economic woes. The initial targets in the war on trade were China (solution: slap on a 45 per cent tariff on Chinese imports) and Mexico (solution: exit US obligations under NAFTA). But the mad ideology runs deeper. The way to making America economically great again is to reduce imports from everywhere (solution: slap on a 10 per cent across the board tariff on imports from everywhere). Their argument is that increasing net exports (reducing imports) boosts gross domestic product.

This is illiterate economic rubbish. ‘According to Ross and Navarro, if the United States made it illegal to import oil, thus wiping US$180 billion off its trade deficit, [US] GDP would rise by US$180 billion’ reports Matthew Yglesias. ‘With labour constituting 44 per cent of GDP, that would mean about US$80 billion worth of higher wages for American workers. So why doesn’t Congress take this simple, easy step to boost growth and create jobs? Well, because it’s ridiculous’, points out Yglesias. There isn’t a single reputable economist in the United States that would buy this argument. What would actually happen is that petrol would become much more expensive, consumers would need to cut back spending on non-petroleum items, businesses would face a higher cost structure, and the overall economy would slow down with inflation-adjusted real incomes falling.

There’s no doubt that a US trade war against the rest of the world inspired by such false logic will end in global tears, rending asunder the carefully constructed institutional rules and norms that have protected the world against such economic and political devastation for the better part of a century. It’s estimated that the trade wars of the interwar period, after the Great Depression set in, were responsible reducing global trade by 66 per cent and deepening and extending the depression at a time when international trade interdependence was much lower.

Can the checks and balances in a mature democracy prevent the United States from turning against itself, its partners and its own rational best interests calculated over so many years? That’s what we might hope for but it would be wishful thinking given the way the Trump team has assumed power and its declared intentions. The US president is under enormous constraint in his or her ability to free up trade, as we’ve seen as President Obama tried to implement the Trans-Pacific Partnership agreement. But Trump faces no similar domestic institutional constraint in executing a retreat from free trade, although he’ll have to tear up some hard-won international agreements in the process. Congress cannot stop Mr Trump imposing his will under ‘executive action’ under existing US law. The president may impose tariffs of up to 15 per cent for 150 days without having to demonstrate any damage.

Will the momentum of Trump’s domestic fiscal expansionism save us from global economic doom, as the markets seem to foreshadow? Most unlikely if the impact of that is carried by tax cuts that do nothing for the provision of public goods in the near term and merely boost spending on imports.

As Yiping Huang gently suggests in this week’s lead essay, ‘[t]he economic policy choices for China in the year ahead are extremely difficult. This is partly, of course, because of external uncertainties — a result of an unclear global economic outlook and a new US administration headed by President-elect Trump’. The domestic policy options are also narrowing as the country faces the so-called ‘risky trinity’ — declining productivity, rising leverage ratios and narrowing policy flexibility — that require the navigation of big financial and structural reforms.

Success in China’s managing the external uncertainties that it and we all now face, and in at least partially navigating its huge domestic reform agenda, is more important to the rest of the world than anyone might have imagined a few short months ago. But that’s where the hope now resides, and it would be wise to quickly acknowledge that, not stand by and let the self-declared outsiders soon to take control in Washington make a total mockery of what’s left of shared values among Asia Pacific democracies.

The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel, Amy King and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

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