Global Economy: Politics Takes the Center Stage

As the quip has it, economists have correctly predicted nine out of the last five recessions.  The widespread apprehension of a looming recession may yet turn out to be misplaced.  But it is true that the long period of global economic expansion since the financial crisis of 2008/2009 will eventually end.  The questions are only when and why.  That said, the signs of an economic slowdown are many, especially in China, which has been the main engine of economic growth in recent years, and in Germany, where a contraction of its export-driven economy signals troubles elsewhere. 

What makes the current situation especially worrisome is that the economic problems are not driven primarily by economic factors.  Rather, politics has taken center stage in two dangerous ways.  First, political dysfunction in leading countries in Europe is exacerbating economic difficulties, and populism is making it politically more risky to manage economies effectively.  Second, political leaders, and first of all in the United States, are using punitive economic tools - sanctions and tariffs - to advance national security interests in ways that undermine the global economic system that has been the foundation of spreading prosperity for the last generation or more.

Triangles and Polygons in Russian-American Relations
Vladimir Vasiliev
The Putin-Trump meeting was held in the spirit of the well-known medical principle “Do no harm.” In the current condition of relations between Russia and the United States, meetings between the leaders of the two nuclear superpowers first of all should not bring the Russian-American relations to an even greater deterioration, as it happened after the meetings in Hamburg in July 2017 and in Helsinki in July 2018.

There is nothing particularly new about the use of sanctions and tariffs to advance national interests.  But those tools have been generally used by more powerful states against weaker ones when they were deployed as weapons of pressure, not used simply to register condemnation of another state’s behavior.  That was true of the sanctions levied against Iran and North Korea for their dangerous nuclear-weapons programs, of US sanctions against state sponsors of terrorism, and of Russian energy cut-offs to former Soviet states.  Now these tools are being used against powerful states that can retaliate to advance specific national security goals.  This is true of the ongoing trade war between the United States and China, and the more recent economic conflict between Japan and South Korea.  When and how these conflicts will end, and whether new ones will erupt, is uncertain, but taken together they have the potential to rewrite the rules of the global economy for years into the future.  One victim could be the World Trade Organization.
The US-China Trade War: No Winners
Clifford Kupchan
The Trump administration seems intent on pursuing escalation until Beijing gives in to US demands that it fundamentally revise its state-capitalist model of development. China, for its part, has retaliated in kind with tariffs of its own, and does not seem ready to concede to Washington any time soon.

In the United States, the trade war with China jeopardizes not only a decade-long economic expansion, but, more worrying for President Trump, the more rapid growth of recent years, stimulated by his tax cuts and vigorous economic deregulation, which he sees as central to his reelection bid next year.  To stave off an economic slowdown, Trump is mounting pressure on the Federal Reserve to lower interests - to artificially stimulate the economy in the short run, no matter what the long-term dangers.  If the Federal Reserve bends to the President’s will, it would set a dangerous precedent, undermining its independence, which is a pillar of the American financial system.  This tension between the Federal Reserve and the President is likely to last at least until next year’s presidential election.
US Foreign Policy in Donald Trump's Era (VIDEOINFOGRAPHICS)
With his “Make America Great Again!” slogan, Donald Trump won the 2016 Presidential election in the United States. Under Trump, US policy made a dramatic turnaround compared to the Obama days: he decided to abolish compulsory health insurance, reduce taxes for the rich, limit immigration, and prefers bilateral trade deals to multilateral arrangements. His foreign policy is also very decisive. He announced the withdrawal of troops from the Middle East and Afghanistan, quitting from international treaties, and initiated a trade war with China. His eccentric style is often referred to as “Trampolitics.” Will it prevail over the current format of international relations?

As for Russia, a global economic downturn and rising instability augur no good.  The two will put downward pressure on commodity prices, including oil, on which Russia’s economic health depends.  It will further dry up investment, which is critical to economic progress and modernization and technological advance.  And a serious slowdown would dramatically raise the cost of the activist foreign policy President Putin has been pursuing in recent years.  Russia, however, has few resources to shape the global economic environment.  Its challenge is to foresee the coming dangers and to fortify itself against them as best it can.      

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.