Governance woes behind US trade war

Illustration: Peter C. Espina/GT

For now, there is still no end in sight to the brewing trade war between the world's two economic heavy hitters. Ignoring voices of objection at home, the Donald Trump administration announced that the second tranche of tariffs on $16 billion in Chinese goods will take effect later this month. Though Trump has yet to fulfill his campaign promise to levy a 45-percent tax on Chinese goods, his logic on trade policy refuses to change.

The reason why the US has provoked and intensified the trade war lies in the incapacity of the global system. Specifically, division of labor in the globalized era has led to the exodus of the US manufacturing industry out of the country. Meanwhile, the US claims that China's "predatory" economy has developed itself into the biggest beneficiary in the system.

That's why the Trump administration insists on attacking China's "stealing" practice in the name of "safeguarding US national interests," regardless of the cost of torpedoing the existing international order.

The robust stock market and economic growth of the US as well as the decline in unemployment have further boosted Trump's confidence in escalating the trade war. His trade policy has gained more acceptance among Americans. However, the logic behind his trade war can hardly hold water.

The era of globalization has been an inevitable development of human society. As people in the global village are more interconnected, trans-regional flow of finance, technology, information, service and talent has re-optimized global production resources, inspiring the development of countries and regions.

The unprecedented development of productivity and international division of labor has prompted developed countries which boast capital and technology advantages to transfer their low-end industries to other countries where labor and land costs are relatively low. Then a great many multinationals have mushroomed, which has objectively precipitated the growth of developing countries.

Economic liberalism has become a paragon of democracy with which developed nations dwell upon with relish. It's also an important pillar for the postwar international order. When developed countries sat on the top of the industrial chain to reap benefits, they never complained about the unfairness of the system but instead became its most powerful defender.

Ironically, the US - the founder of the global system - has now become its most proactive opponent. The Trump administration attacks the "unfair" global system and views China as being complicit in bringing about the fall of the US manufacturing industry and loss of jobs. Such rhetoric has led people to believe that the stature of the US has fallen to a third world country's.

Globalization is not without problem. Apple is a paradigm of a globalized industrial chain, but it's not a nice story. Developing countries at the low end of the industrial chain can only get disproportionally meager profits while lucrative gains flow to developed nations. In this way, the US deficit is far less than the book figures.

More severely, low-end manufacturing has worsened the environment, putting the health of the public in jeopardy. But the US-led developed world just passed the buck.

Emerging economies like China are resigned to be just a factory of developed countries, so they work hard to develop hi-tech and produce high-value-added products to create a level-playing field with developed countries. This is the law of market economy, which, however, has become a threat to its national security and an enemy of its economy in the view of the US.

The strange logic can hardly justify itself.

Denying others a share of the spoils is not the essence of the era of globalization. If developed countries think there's something wrong with the global system, they can appeal to international organizations to carry out reform, instead of resorting to short-sighted practices like threatening with tariffs.

Trump's trade war actually stems from domestic conundrums notably industrial hollowing-out and loss of everyday jobs. The problems are not a result of globalization but of domestic mismanagement. It seems that forcing jobs back home will create jobs, but it can't last long because it will fail to stimulate the fundamental driving force of industrial development. If Trump can make more efforts at boosting the real economy instead of waging a trade war, he may get closer to "Make America Great Again."

Credit: By Zhang Tengjun Source:Global Times Published: 2018/8/15 The author is an assistant research fellow at the China Institute of International Studies. opinion@globaltimes.com.cn

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TPPA in danger of collapse after its biggest critic wins US presidency

KUALA LUMPUR: The Trans Pacific Partnership Agreement (TPPA) faces its biggest challenge with the election of its major critic Donald Trump as US president. The agreement will collapse without the participation of United States, said its prime mover in Malaysia, Datuk Seri Mustapa Mohamed.

The International Trade and In­­dus­try Minister explained that for TPPA to be ratified, it needs at least six countries, accounting for 85% of the combined gross domestic product of the 12 signatories.

“Without the United States, there will be no TPPA,” he said when met in Parliament yesterday.

He added that failure to carry out TPPA may affect the Malaysian economy.

“We went into TPPA for the overall interest of Malaysia. To be a part of this process, to do more trading, as we believe that this will help trade and investment for Malaysia.

“Among the reasons why we joined was to get access to Mexico and Canada, countries that we haven’t gotten access to,” he said.

He, however, was quick to add that it was too soon to make an analysis on the matter.

Trump’s shock victory stunned capital markets around the world with investors seeking safe haven assets such as gold to brace the period of uncertainties.

In an immediate after-effect Asian stock markets fell, with Bursa Malaysia performing relatively better than most other markets, shedding less than 1%.

The US dollar index, which measures the strength of the currency against a basket of currencies, spiked to more than 1,207, largely due to the weakening of emerging market currencies and strengthening of safe-haven currencies such as the Yen and Swiss francs.

The ringgit fell to RM4.224 against the greenback, a nine-month low since Feb 25. Gold spot prices went up by almost 5% to US$1,337 (RM5,645) as investors sought shelter in safe haven assets in the period of uncertainty.

Ministers and chief negotiators of TTPA countries are expected to meet in Peru soon to take stock on the fate of the agreement.

International Trade and Industry secretary-general Datuk J. Jayasiri, who was Malaysia’s chief TPPA negotiator, said there was no indication so far that Washington under President Barack Obama would not table the Bill in the US Congress for ratification.

“All indications from US Trade Representative Michael Froman is that they are working hard to table it. The US has its own domestic process and for Malaysia we will continue the process of amending our laws,” he said.

Peru will host the annual Asia Pacific Economic Cooperaton (Apec) summit on Nov 19 to be attended by Prime Minister Datuk Seri Najib Razak. Obama is also expected to attend.

American Malaysia Chamber of Commerce (Amcham) executive director Siobhan Das said US business investments would continue to find a home in Malaysia.

“Amcham supports all efforts that enable free and fair trade between all parties, and looks forward to working with the new administration to grow US business interests in Malaysia,” said Das.

Malaysian Association for Ame­ri­can Studies (MAAS) President Prof Dr K.S. Nathan believed that Trump would try to fine tune but would not scrap the agreement.

“They may renegotiate some aspects of it but I don’t see Trump pulling back on the TPPA or even the North American Free Trade Agreement”.

The US Embassy’s charge d’affaires Edgard Kagan explained it was still possible that TPPA would be approved by US lawmakers.

“There are different views on trade in the US. President Obama is committed to the TPPA and we will just have to see what happens,” he said.

In theory, the TPPA could still be ratified by Congress during its “lame duck” session.

This is the session which takes places after the US presidential election but before the inauguration on Jan 20 next year.

BY Razak ahmad, Neville spykerman, Mergawati zulfakar, Loshana k shagar, Hemananthani sivanandam, Rahimy rahim, Martin carvalho, andd. Kanyakumari The Star/ANN

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Need to ‘civilise’ capitalism

THE world economy is in a much worse-off shape than even many who know had expected, or what central bankers have come to understand.

Whatever growth there is remains paltry and uneven. Deflation was viewed as a strictly Japanese phenomenon. Now it’s a global threat, being revived and updated by Harvard’s Lawrence Summers as “secular stagnation.” The International Monetary Fund (IMF) says 2016 will be the fifth straight year of global growth below 3.7%, its average for nearly two decades before the recent great recession.

G-20 economies (representing 85% of the world economy, comprising most rich nations and major emerging economies) are expected to again downgrade their forecast to below 3% global expansion this year. They are likely to miss the target they had set for themselves in 2014 to lift their combined output by 2% over the IMF’s then forecast for 2018.

In early September, G-20 leaders met in Hangzhou, China, in the wake of Brexit and the rise of populist politics on both sides of the Atlantic with a strong sense of urgency to placate public discontent. Indeed, they have to “civilise’’ capitalism (Australian Prime Minister) as they seek to revive economic growth and address growing public scepticism about the benefits of free trade and growing backlash against globalisation. “Growth has been too low, for too long, for too few” (IMF chief Christine Lagarde).

Hangzhou consensus

This time G-20 leaders were on the defensive, amid a welter of familiar complaints back home on frustratingly slow growth, rising social inequalities and the surge of corporate tax avoidance. Looking back, the summer of 2016 is viewed not as a period of respite but as the moment it became clear that policy solutions from G-20, IMF and major central banks aren’t working well.

They have proved woefully inadequate. As a result, businesses are pessimistic about growth prospects, as reflected in low expectations for long-term interest rates. Yield on German 10-year notes is negative 0.116% p.a. What’s needed is a new approach. There has to be more growth and growth must be more inclusive.

At Hangzhou, the G-20 list of remedies rivals the world economy in its complexities, running beyond 7,000 words (excluding several lengthy appendices) addressing many issues, including immigration, terrorism, energy and Zika virus. Indeed, it risks looking “like an X’mas tree”. It was preceded by a surprising display of co-operation between China and US, who together ratified the Paris climate change agreement.

A long list of problems was on the table: including overstretched central banks, trade disputes, corporate tax avoidance, inequality and the populist backlash against globalisation and free trade. In the end, the Hangzhou consensus reflected an “innovative, invigorated, interconnected and inclusive” approach towards its main goals. It adopted a wide-ranging package of policies based on “Vision” (of innovative, new drivers of growth); “Integration” (forge synergy among fiscal, monetary and structural reform policies); “Openness” (build an open world economy, rejecting protectionism); and “Inclusiveness” (ensure growth promotes the role of women and youth, and generates quality jobs, addresses inequality and eradicates poverty).

All these won’t be enough to get us out of the rut. The real setback remains one of credibility. G-20’s sprawling agenda is filled with items that have little chance of success. Many stakeholders and opinion-makers are unlikely to take them really seriously. Experience shows that G-20 is better off when it focuses. Better stick with a limited agenda that has a high chance of achieving an outcome. Sometimes, more is done by doing less.

As host, China promoted innovation as the core of the G-20 agenda. This is sensible because: (i) the use of monetary and fiscal policies can only achieve so much. In the longer-run, real progress has to depend on improved productivity – getting more out of existing resources; and (ii) overcoming anxiety arising from the use of technologies and artificial intelligence that threaten jobs. Getting G-20 to think collectively about the downside of innovation and fintech can only help. There is then the endorsement of a set of non-binding principles designed to guide governments in devising cross-border investment policies in an effort to revive cross-border investment, which is sagging along with global growth and trade. The intention is good – there is a need to foster a more open, transparent global environment for investment, and ensure national and international rules remain clear, coherent and consistent. No investment, no trade, no growth.

Globalisation

The Organisation for Economic Co-operation and Development (OECD), i.e. the rich nations’ club, warned last week that growth in world trade is set to lag global growth in 2016, i.e. globalisation as measured by trade intensity has stalled. Other signs are just as worrisome: (i) ratio of world trade to output has been flat since 2008; (ii) volume of world trade stagnated between January 2015 and March 2016; (iii) stock of cross-border financial assets peaked at 57% global GDP in 2007, down by 36% over 2015; and (iv) inflows of foreign direct investment remained well below 3.3% of world GDP reached in 2007.

Indeed, the growing backlash against trade liberalisation as well as recessions in some big commodity producers are adding to the slackening of trade flows and is likely to erode already flagging productivity and ultimately global living standards. All this, at a time of poor economic performance in the rich nations, rising inequality and big shifts in the balance of global power.

So much so, failure to deal with the negative consequences of globalisation has surged into the political agenda of several large nations (including the US) facing forthcoming elections. Worse still, growth is too meagre to generate the jobs that youths expect and to fulfil pension promises for the elderly. Indeed, globalisation has stalled. Does it matter?

Yes it does. Recent history witnessed the first fall in global inequality of household incomes since the early 19th century. Average world real income rose by 120% between 1980 and 2015. The opportunities accorded by global integration should not be dismissed. No man is an island. Globalisation’s failure, however, lies in (a) not ensuring that its gains are not better shared, and (b) just as dismal is failure to assist those adversely affected. But, the net impact on jobs and wages from rising productivity and new technologies has far exceeded rising imports.

Globalisation shouldn’t be made the scapegoat. What’s really needed is better management. I recall Nobel laureate Joseph Stiglitz’s main message in his 2002 book Globalisation and its Discontents: the problem is not globalisation but how the process is being managed. The rules of the game has to include measures to “tame globalisation.” Unfortunately, global management didn’t change. Today, the new discontents are bringing home the same message – only more intensely.

Inequality

G-20 leaders in Hangzhou were preoccupied with the need to placate public discontent about the unequal distribution of the benefits of free trade and globalisation. Hence, a lot of talk about people. China’s President Xi Jinping set the tone: “Development is for the people. It should be pursued by the people and its outcome should be shared by the people. This is not just a moral responsibility. It also helps unleash immeasurable effective demand.”

In China, Xi said: “We will make the pie bigger and make sure people get a fairer share of it.” The global Gini coefficient – the economist’s measure of inequality, has raced passed (Xi’s) “alarm level of 0.6, and now stood at 0.7” (the closer it approaches 1, the greater the inequality in income distribution). “We need to build a more inclusive world economy.”

Unfortunately, globalisation is today seen naively as a zero-sum-game (I win, you lose), with a US presidential hopeful arguing that China’s rise has come at the expense of US manufacturing heartlands – reflecting a rising disenchantment with the global economic order. It’s spreading. Last week, France publicly called on Brussels to end trade deal talks between US and Europe, citing a globalisation “without rules, where social models are pit against each other and dragged downward, where inequalities grow.”

This “docile of discontent” is best illustrated by Branko Milanovic’s controversial “elephant chart,” which was created (from 196 household surveys worldwide) by ranking world population (from the poorest 10% to the richest 1%) showing growth in income between 1988 and 2008, i.e. from the fall of the Berlin Wall to the fall of Lehman Brothers.

His global chart traced the distribution of growth in real income as first sloping right up, then down sharply and up again steeply, like an elephant raising its trunk: it shows big income gains at the high middle and very top, with the era of globalisation offering very little or nothing for those in between (at the bottom and in the middle and working classes in the rich nations who are poorer than the top 15% but richer than everyone else; this group seemed scarcely better off in 2008 than they were 20 years before).

The stagnant fortunes of these Trumpian and Brexiteer discontents in advanced economies are squeezed between their own countries’ plutocrats and Asia’s rapidly rising middle-class. It is this dangerous sharp dip in the chart to near zero which reflects those who occupy this dangerous docile. Milanovic’s study showed that (a) Chinese middle-class and the world’s 1% rich have gained handsomely in the era of globalisation; (b) lower middle-class in rich countries have fared poorly; and (c) rising income inequality remains a serious problem.

What then, are we to do

Global growth are revised downwards yet again as its traditional engines of trade and investment sputter. OECD now estimates the world economy would muster growth of only 2.9% this year. I consider this to be optimistic. Worse, potential growth has fallen in both advanced and emerging economies. The rise in income and wealth inequalities exacerbates the glut in global savings (reflecting the global investment slump). This can only lead to lower trend growth. Economists call this “hysteresis”: long-term unemployment erodes workers’ skills and human capital; and because innovation is embedded in new capital goods, low investment leads to permanently lower productivity growth. That’s why structural and market reforms are vital to boost potential growth. This has become critical in Asean, especially Malaysia.

There are no politically easy solutions. I know fiscal policy (especially productive public investment that boosts both supply and demand) remains hostage of high debts and misguided austerity. For now, the world is likely to remain as IMF’s new mediocre, or in Summer’s secular stagnation, or China’s new normal.

Make no mistake. There is nothing healthy or normal about rising inequality in the face of continuing slow economic growth. Worse, it leads to rising populist backlash against trade, migration, globalisation, even technological innovation. Following the old road of relying purely on cheap and plentiful money leads to a dead end eventually.

Policymakers’ renewed focus on the need to make capitalism more inclusive is welcome. But rich nations need to ditch austerity in favour of purposeful fiscal support – emphasising structural supply side reforms. There is no other way to unleash effective demand. The tools are already available. Finally, of course, there is innovation.


By Lin See-Yan

Former banker, Harvard educated economist and British Chartered Scientist, Tan Sri Lin See-Yan is the author of “The Global Economy in Turbulent Times” (Wiley, 2015). Feedback is most welcome; email: starbiz@thestar.com.my.


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AIIB attracts nations from East, West, its fate connects to Chinese economy

AIIB’s fate connects to Chinese economy

The Asian Infrastructure Investment Bank (AIIB) officially opened for business on Saturday. In the past two years or so, the bank has been a subject of heated discussion as a symbol of change in the world order. However, its significance hinges on a number of factors in future, rather than the founding itself.

There are many advantages in terms of the bank's operation and management. Infrastructure construction in Asia, which the AIIB is centered on, is virgin territory that has huge potential to be tapped. There is ample scope for the bank to find its role.

With 57 countries as founding members, the starting point of the bank is high. Besides, China as the initiator has abundant capabilities of infrastructure construction, and its experience is applicable to developing countries.

Nonetheless, disadvantages also exist, among which the biggest is the adverse attitude of the US over the bank. It will be more costly for the AIIB to overcome problems than for the World Bank and the Asian Development Bank at critical moments. Therefore, the AIIB must be operated with superb management, leaving no room for any opponents.

The further development of the Chinese economy will provide indispensible strategic support for the AIIB to increase its heft.

The reason why the AIIB could be founded, despite obstructions from the US and Japan, is that the growth of the Chinese economy has shored up the confidence of the participants.

Since its founding, the AIIB has been connecting its destiny to the Chinese economy. The confidence the world has in the Chinese economy will be projected onto the AIIB.

The AIIB touches a nerve of major global powers of the US and Japan. Its inclusive nature enables its smooth start. China has its own interests, but it cannot put its interests above those of the other countries. We should avoid a zero-sum situation, but integrate Chinese interests with others', and make achieving a win-win result a goal rather than a slogan.

With the changing times, China can't expand its power through coercion. It must integrate into the world system and develop in a way that is acceptable to the majority of the world's states.

The AIIB represents China's taking of global responsibilities as a big power. The US, as the world No.1, can capriciously vandalize the rules it makes at some critical moments. But China cannot do so. It has to be well-disciplined in serving the world so as to be recognized and accepted as a rising power in the world. - Global Times

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BEIJING: China has pledged US$50mil (RM221.25mil) to the Asian Infrastructure Investment Bank (AIIB) to support infrastructure projects in less developed countries.

Launching the China-led bank here yesterday, Chinese President Xi Jinping said this proved China’s willingness to shoulder more international responsibility and “push for the perfection of the international system”.

“This is a historic moment,” he added.

With an authorised capital of US$100bil, AIIB was proposed as a global multilateral financial institution by Xi in 2013 to finance infrastructure development in Asia, including energy/power, transportation/telecommunications, rural infrastructure/agriculture development, and water supply/sanitation.

Representatives from 57 founding members, including Malaysia, attended the ceremony at the Diaoyutai State Guesthouse.

Malaysia, which holds 0.11% share and 0.36% of voting share in AIIB, was represented by Treasury deputy secretary-general Datuk Mohd Isa Hussain.

The three largest shareholders of AIIB are China, India and Russia, with a 30.34%, 8.52% and 6.66% stake respectively.

Each allocation is based on the size of the member country’s economy.

The bank, based here, is largely seen as a rival to the US-led World Bank and Interna­tional Monetary Fund.

The United States and Japan have shunned the AIIB while US allies – including Britain, France and Germany – have signed up as founding members.

AIIB president Jin Liqun promised to run AIIB as an organisation that is “lean, clean and green”.

“The bank will make a positive and significant difference in Asian development,” he said.

Speaking on behalf of the non-regional founding members, Luxembourg Finance Minister Pierre Gramegna said the fact that the idea to form AIIB came from the east was a testament to the rebalancing of the world’s economy.

“Without basic infrastructure, markets cannot function well and growth is limited. AIIB will be a boost to the Asian economy, and become a platform for cooperation that will foster economic integration and inter-regional connectivity,” he said.

By Tho Xin Yi The Star/Asia News Network

AIIB opens to lay down milestone for global economic governance

BEIJING, Jan. 16, 2016 (Xinhua) -- Chinese PresidentXi Jinpingaddresses the opening ceremony of the Asian Infrastructure Investment Bank (AIIB) in Beijing, capital of China, Jan. 16, 2016. (Xinhua/Li Xueren)

BEIJING, Jan. 16 (Xinhua) -- The Asian Infrastructure Investment Bank (AIIB), a China-initiated multilateral bank, started operational on Saturday, marking a milestone in the reform of global economic governance system.

Representatives of the 57 founding countries gathered in Beijing for the AIIB opening ceremony in Diaoyutai State Guesthouse. Chinese President Xi Jinping made a speech.

With joint efforts of all the members, the AIIB will become "a professional, efficient and clean development bank for the 21st century" and "a new platform to help foster a community of shared future for mankind, to make new contribution to prosperity of Asia and beyond and lend new strength to improvement of global economic governance," Xi said.

During the ceremony, Chinese Finance Minister Lou Jiwei was announced to be elected as the first chairman of the AIIB board of governors. Jin Liqun was elected the first AIIB president.

In addition to subscribing capital according to plan, China vowed to contribute 50 million U.S. dollars to the project preparation special fund to be established soon, to support the preparation for infrastructure development projects in less developed member states.

The AIIB will promote infrastructure related investment and financing for the benefit of all sides, Xi said, keeping Asia's enormous infrastructure development demand in mind.

Calling the initiative to establish the AIIB "a constructive move," Xi said it will enable China "to undertake more international obligations, promote improvement of the current international economic system and provide more international public goods."

Statistics from the Asian Development Bank (ADB) show that between 2010 and 2020, around eight trillion U.S. dollars in investment will be needed in the Asia-Pacific region to improve infrastructure.

Xi expected the China-initiated institution and other existing multilateral development banks to complement each other for mutual strength and cooperate on joint financing, knowledge sharing and capacity building.

In his address at the founding conference of the AIIB council on Saturday afternoon, Chinese Premier Li Keqiang said the operation of the new multinational development bank is "of positive and constructive significance for the global economic governance reform."

Hailing Asia "an engine" for the global economic growth, Li said the sustainable development of the Asian economy and regional economic integration rely on the infrastructure construction and connectivity, which would help facilitate the flow of trade, investment, personnel and information.

The aim of China initiating the AIIB is to widen financing channels, expand general needs and improve supply so as to bring along the common development in the region and promote world economic recovery with its own achievements, he said.

The premier called on the AIIB to integrate the China-proposed Belt and Road initiative with each country's development strategies, promote international cooperation on production capacity and innovate more modes to realize a diverse and inclusive cooperation.

Global leaders extended congratulations to the opening of the multilateral development bank.

"The ADB will cooperate closely with AIIB in supporting the development of the Asia Pacific region," said ADB President Takehiko Nakao in a congratulatory message to the opening of the AIIB.

"We will cooperate closely to provide support and constructive suggestions for the AIIB development," said Yoo Il-ho, deputy prime minister of the Republic of Korea at the opening ceremony.

China's Vice Finance Minister Shi Yaobin said in an interview with Xinhua that China does not intend to apply for financial support from AIIB in the initial stage.

"Though as the biggest shareholder of AIIB and the biggest developing country in the world, China is fully qualified to gain loans from the AIIB, but we made the decision mainly because that many other countries in the region are in more urgent need for infrastructure development," said Shi.

Shi said China holds 30.34 percent of the whole capital stock, with the first batch of capital stock worth 1.19 billion U.S. dollars already in place.

The AIIB was proposed by President Xi Jinping in October 2013. Two years later, the bank was formally established as the Articles of Agreement took effect on Dec. 25 last year.

As its name suggests, the AIIB will finance construction of infrastructures -- airports, mobile phone towers, railways and roads -- in Asia.

Amid the evolving trend of the global economic landscape, Xi expected the AIIB will help make the global economic governance system more just, equitable and effective. - Xinhuanet

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