The United States has changed its strategy towards China from being the champion of integrating it in the global economy to doing whatever it takes to neutralize and contain the new competitor that will reshape the global economy in the years to come, writes Marc Uzan, Executive Director of the Reinventing Bretton Woods Committee. The disentanglement of the global economy will be the new narrative after the chapter of globalization.
The global economy is at an inflection point. The threat of a permanent trade dislocation starting to be real with for example German industry reporting the worst business climate for nine years. Trade wars, geopolitical tensions and the potential of hard Brexit with the current slowdown of the Chinese economy are all a recipe for a major synchronised global slowdown. Interest rates are not going to back up anytime soon, trade uncertainty has becoming a permanent feature of policymaking. Central banks will not be able to return to the policies that they relied on before the global financial crisis. Policy rates will not rise again and central bank balance sheets will not soon return to zero.
Central bank independence is under attack. Trade is not a problem that can be solved by monetary policy. President Trump has called on the Federal Reserve to cut interest rates by a full percentage point extending a year campaign to put pressure on the central banks that the USA needs to lower rates adding that manufacturers are being hurt by the strong dollar. “We are being handcuffed by the Federal Reserve” was the expression that he used. The other argument within that administration is to have the US to bring their interest rates in line with the rest of the world. Notably, he also labelled China a currency manipulator: a move that would serve as a political justification for more tariffs and perhaps to a forthcoming currency war with the US government intervening in the foreign exchange market.
The United States has not only given up on the world trading system but more generally has changed its strategy towards China from being the champion of integrating it in the global economy to doing whatever it takes to neutralize and contain the new competitor that will reshape the global economy in the years to come. The disentanglement of the global economy will be the new narrative after the chapter of globalization. Global value chains are disrupting and a total new landscape will emerge.
Geopolitical uncertainties were clearly articulated at the recent G7 summit in Biarritz. Despite its new format, this is the first time that you have in fact a competitive global governance with G7 with participants and guests who have in common the fear of China becoming an agent for change in global governance (India, Australia, among others, who are very concerned about the Belt and Road Initiative.)
Trade uncertainty has clearly damaged global business confidence (slowdown in investments.) but for now this is offset by easier monetary conditions. For emerging markets, the trade war between the United States and China has shown a worrying long-term trend. The forces of global growth that boosted emerging markets, trade, supply chains and the commodities super cycle are over and raise a fundamental question: what will be the new growth model for emerging markets?
In the case of Russia structural reforms will remain the main challenge. Weak economy growth and falling real incomes need to be addressed in the context of falling commodities prices. In case of a new instability, the central bank has built resilience to face short-term shocks. Russia will also need to adapt to long-term western sanctions.