Monthly Archives: July 2023

For decades, China set a shining example of how to capitalise on globalisation to accelerate domestic economic growth and development. These days, however, the country risks becoming a cautionary tale about mishandling globalisation’s shift from a beneficial tailwind to a disruptive headwind.

Although the Chinese economy’s recent travails have some unique characteristics, they illustrate the growth challenges facing many developed and developing countries. They also show that while economic growth is not everything, you cannot solve much of anything without it.

This year was supposed to mark a robust economic recovery for China. Instead, many analysts have been forced in recent days to again revise down their projections for Chinese growth, and more are likely to follow suit. This increasingly pessimistic outlook can be attributed to three main factors.

First, as the most recent trade data show, the global economy no longer supports China’s domestic growth dynamics. In June, Chinese exports fell by 12.4% (in dollar terms), and imports declined by 6.8%, far worse than the consensus forecast of a 10% decline in exports and a 4.1% decrease in imports. These disappointing figures are the result of sluggish demand growth in Europe and elsewhere, and enhanced restrictions against China, particularly those imposed by the United States, which created a self-reinforcing cycle that further dampened the country’s growth prospects.

Second, the Chinese authorities appear to be torn between two distinct approaches to stimulating the economy, resulting in a rather indecisive policy response. While the government seems inclined to revert to the top-down stimulus measures it employed in the past, actual implementation has been limited, owing to concerns about exacerbating inefficiencies and impeding the ongoing and generally orderly deflation of debt bubbles in certain sectors. Conversely, the much-needed alternative of unleashing bottom-up economic dynamism is constrained by domestic political considerations, leaving China stuck in the muddled middle. Meanwhile, domestic policy challenges are compounded by structural factors, including the aging population, high youth unemployment, and remaining pockets of excessive leverage.

Third, the removal of the long-standing zero-Covid restrictions has not led to a uniform sharp increase in household, business, and property demand. Instead, the process has been uneven and weaker than consensus forecasts. While GDP bounced back by 6.3% in the second quarter, growth fell short of the 7.1% pace that analysts expected.

Given that growth in Europe and the US is likely to remain subdued for the foreseeable future, and with the global economy still reeling from the impact of the most aggressive wave of interest-rate hikes by central banks in advanced economies in several decades, China cannot count on globalisation to rescue its faltering growth model. As companies seek to diversify supply chains away from China, inflows of foreign direct investment have also been constrained. Moreover, geopolitically-driven trade and investment restrictions are more likely to increase in response to US national-security concerns.

Rather than seeking salvation from external demand, China needs to sharpen its focus on domestic sources of robust and sustainable economic growth. Here, policy implementation has lagged, failing to match political leaders’ rhetoric. Similarly, the country’s industrial-policy framework has yet to strike the right balance between macro-level directives and providing sufficient operational autonomy at the micro level.

To avoid the middle-income trap that has repeatedly ensnared emerging economies, China must avoid policy inconsistency. That said, and with only a small handful of exceptions, it is difficult to point to any sizable economy that has managed to evade this trap over the past few decades.

While China represents a special example of “muddled-middle” growth strategies, it is not the only country in danger of falling into a growth trap. Both developed and developing countries face a similar risk of economic stagnation or, worse, regression.

With the exception of the US, few systemically important economies have recognised the significance of comprehensively reinvigorating their growth strategies. And even in the US, where recent government actions have focused on generating higher and more sustainable growth, the process is still susceptible to disruption by another Federal Reserve policy error.

Over the past two years, Gordon Brown, Michael Spence, Reid Lidow, and I have been discussing strategies that would enable governments to deliver the inclusive, durable, and sustainable growth needed to meet their citizens’ needs and aspirations. The results of these deliberations are outlined in our forthcoming book Permacrisis: A Plan to Fix a Fractured World, which will be published in September.
Our vision is simple. By adopting a “reduced form” approach, we have identified a manageable set of actions focused on three key areas: reengineering stagnant and increasingly ineffective growth models, improving domestic economic management, and enhancing global policy coordination and responses. We firmly believe that a detailed set of realistic and actionable measures could reverse worrisome secular developments, including declining growth and productivity, rising inequality, and heightened financial fragility.

Our findings could apply not only to China and other developing countries, but also to the world’s major developed countries, whose domestic malaise and weak global engagement undermine their economic and social well-being and the stability of the international system. Despite the policy mistakes that have put our world on its current course, we now have an opportunity to heed the lessons of the past and present and chart a more promising path for future generations.

The author is President, Queens’ College, University of Cambridge, and professor, Wharton School, University of Pennsylvania

Copyright: Project Syndicate, 2023.
http://www.project-syndicate.org

The United States has a problem:
Economic
freedom is under threat. The Heritage Foundation’s 2023 Index of Economic Freedom gives the U.S. its worst rating since the first index in 1995. Accordingly, as many as 16
European
countries now enjoy
more economic freedom
than the U.S.!

I visited the U.S. quite often this year and last, conducting over 50 interviews with mostly conservative radio and TV stations. I noticed that resentment against “big business,” the “super-rich,” and even capitalism is no longer something you only find on the Left, where you would expect, but is also rising on the Right. Former President Ronald Reagan is no longer the undisputed conservative hero, and, in some cases, resentment against capitalist globalization and free trade on the Right is indistinguishable from the antipathy of the Left. Sen. Bernie Sanders (I-VT) and former President Donald Trump are not that far apart when it comes to free trade.

REPUBLICAN CANDIDATES TEST HOW FAR THEY CAN GO IN CRITICIZING TRUMP

We see the same tendency in Europe: Anti-capitalism is not only intensifying on the Left, but it is also increasing on the Right. The radical Right in many European countries — France, for example — has adopted traditionally left-wing economic policies, calling for bigger government and a tighter rein on the market. In the U.S., journalist Michael Schaffer recently
wrote
in Politico:

It was high time for the Republican Party to articulate opposition to these developments. Recently, numerous leading figures, including Grover Norquist (the leading anti-tax advocate), Dick Armey (author of Freedom Revolution), George Will, and a host of prominent think-tank representatives, published a
manifesto
. The manifesto includes the following:

Under Reagan, such commitments were a matter of course for the Republican Party. Nowadays, unfortunately, that is no longer the case. Yet today, it is more important than ever to remember these truths.

President Joe Biden is increasingly leading the U.S. toward a planned economy. What he calls the “
Green New Deal
” has already failed catastrophically in Germany. The transformation of Germany’s energy industry into a planned economy began under Angela Merkel, and German Minister of Economics Robert Habeck has picked up where Merkel left off. The consequences: In the International Monetary Fund’s latest World Economic Outlook, Germany is the only one of 22 countries and regions expected to experience a decline in GDP in 2023, a predicted fall of 0.3%, an even worse performance than Russia. The impact of planned economy policies needs a certain time to unfold, and a continuation of “
Bidenomics
” would hit the U.S. hard.

Reagan created 17 million jobs by cutting the top tax rate from 70% to 28%. He also defeated inflation. Biden is equally proud of the jobs he has created, but they largely just replace jobs lost during the COVID-19 pandemic.

CLICK HERE TO READ MORE FROM RESTORING AMERICA

Biden’s policies need a clear counterposition. And that can only be “Reaganomics, not Bidenomics.” Reaganomics advocated smaller government, lower taxes, and deregulation. Bidenomics equals big government and less market freedom.

Thankfully, the authors of the Freedom Conservatism manifesto remind us why the U.S. has been so successful. The principles of capitalism must be defended today against the Left — and against segments of the Right. I am optimistic because a majority of people still believe in capitalism, as an Ipsos MORI survey for my book In Defense of Capitalism confirms. The survey has now been conducted in 34 countries. The result: Second only to Poland, the U.S. is one of seven countries where support for capitalism remains strong.

Rainer Zitelmann is the author of the book
In Defense of Capitalism
.

By Lucy Craymer and Joe Cash

AUCKLAND/BEIJING (Reuters) – China should be able to meet standards set out in a major trans-Pacific trade pact, trade experts say, forcing members to make a politically uncomfortable decision on whether to let Beijing join a deal created to counter its growing influence.

Britain joined the Comprehensive Progressive Trans-Pacific Partnership (CPTPP) at a meeting in Auckland this month just over two years after its application, clearing the way for members to consider others from China, Taiwan, Ukraine, Costa Rica, Uruguay and Ecuador.

China’s application, by far the biggest economy, is next in line if they are dealt with in the order they were received, although that is not a given.

When asked whether there was a time frame for when the next applications would be considered, CPTPP host nation New Zealand’s Trade Minister Damien O’Connor said: “No.”

The free trade agreement has its roots in the U.S.-backed Trans-Pacific Partnership, developed in part to counter China’s growing economic dominance. The U.S. pulled out under President Donald Trump and it was reborn as the CPTPP with members including close U.S. allies Japan, Australia and Canada.

China wants to be part of the CPTTP because the ruling Communist Party places a lot of stock in its economic performance, which has suffered recently due to various trade restrictions, and because it sees the bloc’s high accession requirements as fresh impetus for economic reform at home, analysts say.

The absence of the world’s largest economy incentivises China to meet the high entry requirements as “the hidden motive” for Beijing is to “defeat the scheme by the U.S. to use the CPTPP as a way to contain China,” said Henry Gao, a law professor at Singapore Management University.

A Chinese Ministry of Foreign Affairs spokesperson said its application was in line with efforts to deepen reform and expand trade cooperation with other countries.

TECHNICAL HURDLES

The CPTPP requires countries to eliminate or significantly reduce tariffs, make strong commitments to opening services and investment markets and has rules around competition, intellectual property (IP) rights and protections for foreign companies.

“The conventional wisdom is… that ‘Oh well, it’s too high level and China with its state-owned enterprises (SOE) couldn’t get into that agreement. So therefore it’s not going to happen.’ I think that is completely wrong,” Tim Groser, a former New Zealand trade minister and chief trade negotiator said.

He said there was a desire by at least some in China to use the agreement to drive reform such as in SOEs.

However, China offers SOEs subsidies and could struggle to meet the requirement to be an open and market-driven economy. And while IP rights are improving, there continue to be high-profile cases of IP theft from Western companies.

The CPTPP also has a focus on digital trade and prohibits forcing foreign companies to store local data in country – for example, in China. Beijing’s data sovereignty laws have only become tighter in recent years.

“If a country’s economies rules are really quite far apart from what CPTPP says, then inevitably there’s quite a big question about whether they could undertake really, really massive reforms,” said Graham Zebedee, Britain’s CPTPP chief trade negotiator, without commenting specifically about China’s application.

Trade experts noted the pact does have exemptions, such as protections for national security, and China showed it could liberalise when it joined the World Trade Organization.

“The CPTPP is important for us. Not because it’ll be easy but exactly because it will be difficult and tough,” China’s Ambassador to New Zealand Wang Xiaolong said in a recent speech. He said potential accession was an “impetus to the domestic reforms” that would be undertaken.

SHADOW OF POLITICS

Ultimately the decision will be political rather than technical, because a deal to allow a new entrant must be agreed upon by all members. Australia, for example, has said it would not endorse China’s application while Beijing continues to block the import of Australian goods including wine and barley.

Furthermore, the U.S., Australia, Britain, Canada, Japan, and New Zealand last month signed a statement condemning economic coercion that was widely seen as referring to China’s behaviour at a time when many countries are looking to lessen supply chains’ reliance on Beijing.

Hopes also remain that the U.S. might reconsider its early CPTPP withdrawal, creating a dilemma for signatories given their veto power and the risk China, if admitted, could block a future U.S. entry.

“I think Japan, Australia, Canada and Mexico, they have to all act on their own. The U.S. walked away, so they shouldn’t really try to restrict others to talk with other partners,” said Wang Huiyao, president of the Center for China and Globalization think tank and a former member of the Chinese People’s Political Consultative Conference political advisory body.

When asked if the U.S. would reconsider joining the CPTPP, U.S. Secretary of State Antony Blinken told reporters in Wellington last week it is focused for now on the Indo-Pacific Economic Framework, which aims to improve supply chains and business conduct but is not a free trade agreement.

China has backed a rival Asia-Pacific trade pact called the Regional Comprehensive Economic Partnership (RCEP), which excludes the U.S. and involves cutting tariffs rather than opening up economies and dictating labour and environmental standards as the CPTPP does.

For CPTPP members, China’s application is not the only political dilemma. Taiwan is also seeking to join the pact, in a move opposed by China that member trade negotiators remain unsure about.

“It’s a consensus. So ultimately it depends on what everyone decides at the table,” said Natalie Black, Britain’s trade commissioner for Asia Pacific.

(Reporting by Lucy Craymer in Auckland and Joe Cash in Beijing; Editing by Jamie Freed)