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Restart for Globalization? What Went Wrong? What Might Go Right?

By Shlomo Maital

 globalization

   What went wrong with globalization? Where did we screw it up? My friend Clyde Prestowitz, President Ronald Reagan’s trade negotiator, has summed it up very well in his article in The Atlantic.  

     Put very simply:     America ran up huge trade deficits, $800 b., that lasted for 25 years, borrowing heavily from Asia, mainly. This is known as “living beyond your means”. Why? Americans enjoyed living beyond their means, and Asian countries got a growth engine, from American spending financed by Asian loans.  This is globalization gone awry. Why? Because it cannot be sustained. Eventually trade must be balanced. The system failed, because it did not include ‘balancing mechanisms’ that J. M. Keynes envisioned.

     Here is what Prestowitz envisions for the near term, after the Trump administration begins to change U.S. trade policies:

“The results of the election seem to indicate that-the views of economists and foreign-policy experts notwithstanding-America is about to change course on trade policy. That doesn’t necessarily mean a return to pre-World War II protectionism. It could instead simply mean a revival of the spirit that inspired the foundations of the postwar economic order. That spirit, articulated by the economist John Maynard Keynes, focused on assuring balanced trade-the avoidance of chronic surpluses on the part of some trading partners and chronic deficits on the part of others.”

   So, what will this New Order look like, might look like, in the Age of Trump? Here is Prestowitz’s take:

   “Thus a new order might operate to prevent the misalignment of currency valuations, to abolish or offset the impact of tax subsidies, and to mitigate the implicit subsidization of state-owned enterprises. It has been largely forgotten that one of the key objectives of postwar free-trade policy was to maintain a roughly balanced trade account-a goal that the country is likely about to pursue anew and that will likely affect its policies touching on not just trade, but investments, currency, technology, and labor as well.”  

     Could this story of the ‘restart of globalization’ have a happy end, not just for America but for the world?   An end, without a major crisis?

 

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China: Big Nation, Big Worries

By Shlomo  Maital    

China debt

   A new survey shows that half of Americans believe the recession is still alive and well,  despite the booming stock market.  And close analysis shows that the world’s second biggest economy, China, also has big worries.  So when the world’s two largest economies are struggling, global managers need to be on their toes, to daily track events and manage risk. 

    My friend Clyde Prestowitz, formerly President Reagan’s trade advisor and now head of Economic Strategy, has provided us with some quality insights into China’s current predicament. “This is the start of a new ball game with China,”  Clyde warns.    Here is a summary:

  • Xi Jinping’s two major goals are: 1)Restore the power of the center and ensure the sustainability of the Party’s rule. 2) Restore China to its historical position of prominence of the world stage.  This marks a departure from the line of Deng Xiaoping who urged : “observe calmly, secure our position, cope with affairs calmly, hide our capacities, bide our time, maintain a low profile, and never claim leadership.”   ●  Two schools of thought now contend in Beijing – one advocating the low profile approach, the other saying that this low profile has encouraged Japan and other Asian countries to push their claims in the North and South China Sea, and arguing that it is now time to show a more assertive posture. ● Xi seems clearly to be leaning toward this latter approach: What he is now basically saying to the US is rather something like:” We still have to catch up with you in many domains but from now on we intend to deal with you on an equal footing basis.  …While Xi Jinping is the most powerful Chinese leader since Mao, is his grip on power already beyond the risk of a backlash or not and how far are we from a fully stabilized power landscape in Beijing?   ● China’s high nominal GDP growth rate is not necessarily a good sign. It arises from an eventually unsustainable system that has already taken China’s total debt to about 250 percent of GDP while continuing on a path to much higher levels. Much of this debt has been contracted in the course of building enormous excess capacity in the real estate, manufacturing, and infra-structure sectors. Since excess capacity does not generate income for the paying off of debt, the debt load will eventually be shifted to some sector capable of paying.  ● Regardless of how it is paid, a shift in the structure and direction of the economy would entail at least a temporary slow-down of the Chinese economic growth rate to something like 3-6 5 GDP growth. Such a reduced growth rate would actually be a positive sign. However, because it would be seen negatively by many, and because it would be costly to vested interests, there will be enormous opposition to taking the steps necessary to achieve the temporarily slower growth rate.  ● This is obviously a crucial moment in China, during which a number of shifts are occurring, with major implications for the country itself as well as for the global economic and geopolitical balance. ●  While trying to decipher the developments it is important for decision-makers and China watchers to think outside the usual obsolete templates of “moderates” and “hard-liners” “reformists” and “conservatives” which serve only to blur the picture and distort judgment. The present reality in Beijing is too complex to be encapsulated in simplistic labels.
  • This is the start of a new ball game in dealing with China. It will keep us on our toes for years to come.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
October 2017
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