Beyond the United States, the world’s leading economies appear to be faltering. World No. 2 China recently showed a slowdown in consumer spending and in lending, while No. 3 Japan and No. 4 Germany both contracted in the third quarter. What does this mean for U.S. policy?
The Trump administration has focused much more on China than on the other leading economies. The president and his team seem to view such economic weakness as an opportunity. They discuss the trade war with China as a battle of attrition.
First, they convinced themselves that China would be too cowed to retaliate. It wasn’t. Then, the president seemed to figure that, because U.S. imports from China exceed Chinese imports from the United States, China would have to concede once it could no longer ante up. It didn’t.
Finally, their view seemed to be that economic weakness would leave China incapable of holding out against U.S. moves. It hasn’t. While China has certainly seemed willing to deal, this willingness dates back to the start of the Trump presidency; it was not the new result of a cooling economy.
So, if economic slowdowns do not compel the world’s major economies to submit to aggressive Trump unilateralism, what effects will slowdowns have? They may stoke policies the United States dislikes, push trade indicators in a direction the Trump administration abhors, and threaten contagion that could spread to the United States.
China and the world’s other major economies are most likely to react to economic slowdown with stimulus of one form or another. To the extent that stimulus is monetary, this will mean lower interest rates and, in turn, pressure for currency depreciation against the dollar.
This currency pressure will also come from global investors redirecting their funds from their own slowing economies to the relatively booming economy in the United States. That, too, will push up the dollar.
This is not the same as currency manipulation. In fact, the Chinese central bank has been fighting pressures for the RMB to depreciate. But that, too, is counter to a longstanding American policy stance; the U.S. request has generally been for China to let its exchange rate reflect market forces, not to intervene more heavily.
These pressures to swing investment toward the United States and allow currencies to depreciate against the dollar will cause a particular problem for the Trump administration, which has treated trade deficits as the star it uses to navigate its trade policy.
If one mistakes an airplane overhead for the North Star, it is easy to end up well off course. That problem is likely to be exacerbated as major global economies slow in absolute terms, and especially relative to the United States. U.S. trade deficits will grow and the Trump administration will become even more convinced that the country is being cheated.
The U.S. trade deficit in goods and services in 2018 through September did, in fact, increase 10.1 percent over the same period in 2017. U.S. exports grew, but imports grew slightly faster in percentage terms.
This occurred, of course, as the Trump administration ratcheted up U.S. tariff and quota protection against much of the world in a misguided attempt to “correct” trade deficits. The disconnect between policies and results further illustrates the fact that trade deficits reflect macroeconomic factors such as economic growth, rather than imbalanced trade policies.
The final policy concern about slowing global economies is that economic torpor could prove contagious. While the Trump administration has tended to view China predominantly in the context of the bilateral relationship, China’s economic boom and voracious demand for natural resources as inputs propped up growth in countries such as Australia and Brazil.
Slowing economic giants can pull their partner countries down with them, and global economic slowdowns are rarely beneficial for U.S. growth. Downturns can be even more problematic if they expose deep-seated problems in critical countries, such as excessive debt.
The recent reports of economic slowing in leading global economies do not yet constitute a crisis. Yet, they should not be seen as a fluke, either. In its October World Economic Outlook, the International Monetary Fund concluded that the global economic expansion may have peaked and that downside risks to global growth have risen.
To the extent that a prosperous global economy could more easily absorb the costs of Trump administration economic policy mistakes, the latest news of slowdowns presage a climate that may well be less forgiving.