Prosperity threatened by interest rates, oil, and trade wars

by Trade Correspondent L.C. —

The world economy faces three principal threats at the moment:

• Rising interest rates, endangering those emerging economies with heavy debt burdens;
• Possible Saudi-triggered oil price increases in the wake of the Khashoggi affair; and
• Ongoing trade war among the US, its allies, and China.

Regarding the US-China trade war, while the two countries’ presidents could still get together at the Group of 20 (G20) Summit in Buenos Aires — set for November 31^st-December 1^st — most of the past week’s trade news has been confrontational:

• The Justice Department announced the extradition from Belgium of a Chinese Ministry of State Security intelligence officer who it had indicted on multiple charges of economic espionage, technology theft, and attempted recruitment of spies.
• The Treasury and Commerce Departments announced the preliminary implementation of heightened government scrutiny of foreign (read: “Chinese”) investment as well as new restrictions on the sale of nuclear technology to China.
• The President renewed his threat to slap tariffs on another $267 billion in Chinese exports.
• China enhanced a cybersecurity law that allows government intrusions and theft of US companies’ technology, in addition to the law’s potential for human-rights abuses.
• Chinese responses to the US tariff and security measures have verged on the ludicrous. An article in the Chinese government’s People’s Daily complained that the US is refusing to export the advanced, high-tech products that China wants to buy – such as four aircraft carriers!

The WTO, US, and China

Besides the possibility of a Trump-Xi meeting at the G20, another venue where US-China disputes could be addressed is the WTO. The intensifying talks of WTO reform are focused on China. This week, WTO head Roberto Azevedo, and others, suggested that the WTO could mediate US-China disputes and discuss reforms to address US concerns about China.

Recently US WTO Ambassador Dennis Shea made public remarks laying out where the Trump Administration sees these efforts going. He made positive observations about the WTO, touted US engagement in Geneva, and made clear that he doesn’t expect a sudden US withdrawal. “The President is right to say that the WTO needs to shape up. I am delivering some difficult messages in a friendly way.”

Shea suggested that he sees a real possibility for WTO reform but doesn’t think it will be able to deal effectively with non-market economies like China. Thus the US unilateral track will remain.

The first thing on the reform agenda, he said, is the notification proposal first raised by the US – that WTO members must take seriously their obligation to notify their subsidies and other trade practices as required by WTO rules. Still, he said that all aspects of the WTO need to “shape up…. The negotiating function needs to be reinvigorated. The dispute settlement system needs to be fixed. The monitoring function is in disarray.” The China issue is linked to the US concern over countries being able to self-designate as “developing,” without differentiation between levels of development. This allows some major economies to benefit from the WTO’s Special & Differential treatment through which they can escape some WTO obligations.

He criticized the EU reform paper’s proposals for the Appelate Body (AB), charging they would make the AB less rather than more accountable, by giving judges a longer term, making judgeships a full-time job as well as supplying the AB with more resources. The EU has already rejected this US criticism.

IMF: US has everyone worried

Trade grabbed the attention of international institutions as leaders met for the the IMF/World Bank Annual Meetings that took place in Bali, October 12^th-14^th. The heads of the WTO, IMF, World Bank, and OECD issued a joint statement, backed up by individual remarks, all warning against growing protectionism and calling on countries to find solutions. According to the joint statement, “The trading system is not perfect – but it represents the best efforts of governments around the world, working together for 70 years, to find ways to cooperate on trade issues.”

As IMF chief Christine Lagarde put it, “De-escalate. Fix the [international] system, don’t break it.” She suggested that the WTO can be used to attack China’s practices in some areas, though it may need enhanced rules to go after subsidies.

Vietnam, Japan, and the Trans-Pacific Partnership (TPP)

Vietnamese Prime Minister Nguyen Xuan Phuc said he expects the legislature to ratify TPP membership by end-November. That would be the fourth ratification (after Mexico, Japan, and Singapore), meaning only two more would be needed to bring the agreement into force. Australia is also close to ratification. It is expected that the TPP will be opened to new members quickly, perhaps during the coming year. South Korea was the first to declare its intent to request accession as soon as the existing members allow it, but others are waiting in line as well. Prime Minister Shinzo Abe recently endorsed the prospect for TPP accession by both the UK and Thailand.

Japan has been the key moving force behind the TPP, following President Trump’s withdrawal from the pact and threats of US auto tariffs or quotas against Japan. The US President does not seem to sufficiently appreciate the extent to which a close US-Japan relationship is crucial to containing a hostile and belligerent China.

Separately, EU Trade Commissioner Cecilia Malmström said on October 9th that this coming week the European Commission will approve the EU-Vietnam FTA and send it to Parliament and  the European Council for ratification. Vietnam has FTAs already with Japan, China, South Korea, Russia, Australia, among others, and it is negotiating more.

RCEP: progress but still no final deal

Regional Comprehensive Economic Partnership (RCEP) trade ministers, meeting in Singapore October 13th, discussed progress thus far in the negotiations and the goal of completing a framework this year. That goal still looks difficult, though ministers said, as they have in the past, that growing protectionism and the US-China trade clash give an incentive to conclude the agreement.

Japan has pushed for RCEP progress, just as it took the lead in reviving the TPP. The main obstacles remain the differing levels of development among RCEP countries, a problem that the TPP  managed to overcome. But the TPP did not include India and China, the interplay of which has been the biggest hindrance to an RCEP.

Click here to go to the previous Founders Broadsheet (“Strategic caution required in Khashoggi affair”)