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Some Consequences of Brexit -

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Some Thoughtson the Global Economy
Andrew K. RoseBerkeley-Haas andABFER, CEPR, NBERApril, 2018
Update on Global Economy: Andrew Rose
Bigger Picture
Global Economy experiencing cyclic upturnEurope growing > 2% (!), Japan > 1% (!!)Medium Term Issues with Potential Trade WarMore Serious Possibility of Real War (Korea, Iran)Longer Term picture looks bleakFiscal Woes in Rich CountriesPopulation AgingLow Productivity GrowthJapan as the leader in all such thingsUncertain Impact of Climate Change
Update on Global Economy: Andrew Rose
Where’s the Excitement?
AmericaEast Asia, especially Korea and ChinaEUNot: Africa, Latin America, South/Central AsiaFinancial Markets?Rising VIX, flatter yield curve, rising TED spread (LIBOR-FedFunds)
Update on Global Economy: Andrew Rose
American Fiscal Policy
Fiscal expansion coming at #$%^&*() timeFull employment (or close to)Debt levels highPopulation agingLikely to add to inequalityLeads to temporary acceleration of growthPro-cyclic fiscal policy (!), reduced future shock absorber capacity
Update on Global Economy: Andrew Rose
American Monetary Policy
Monetary tightening likely to continue apaceNew Fed will behave much like oldPowell, Williams,Claridaall mainstream, respectedBut lower real interest rate means reduced future room to respond to shocksQE debt being unwound, but QE may resurfaceSheer quality of Fed leadership falling
Update on Global Economy: Andrew Rose
In the Future: Capital Flows and Exchange Rates
American fiscal expansion pushing up US interest ratesSimilarly, monetary tightening is also raising US ratesBoth serve to attract capital inflows, appreciateAppreciation of dollar, worsening of US current account seems likelyUndermined by Trumpian uncertainty?Will affect all countries in American sphere of financial influence – especially developing and emerging markets in Latin America, Caribbean, Asia-PacificTrump concern with current account deficit (≡ Savings – Investment) means that savings shouldrisenot fall to lower current account deficit
Update on Global Economy: Andrew Rose
Trade War Coming?
Unusual for trade tensions duringgoodtimesIronic that USA, creator of rules-based system, now undermining itViolating old agreements raises geopolitical tensionEx: Iran nuclear deal and Korean
Update on Global Economy: Andrew Rose
Should America Care about Trade?
Agreement that trade matters for employment, wages“China shock” well documentedEspecially in manufacturing-intense areas and for low-wage unskilled workersContinuing role for high quality public education!Also consensus that automation matters much more over long periods of timeThe one issue Trump cares about consistentlyBilateral deficits a special mysteryHence continuing uncertainty over NAFTASpecial tension with countries with large current account surplusesChina, Japan, Germany – a rival and two key alliesSo far, more bluster than action but in future … ?
Update on Global Economy: Andrew Rose
Economists and Free Trade
Essentially all conventional economists agree that trade should be free. Why?Free tradedoesn’thelpeveryonein theory or practice. But …Tariffs are almost never the targeted solution to a problemOther trade barriers (quotas, NTBs) are worse than tariffsTariffs create microeconomic distortions, inefficiencyConsumers pay more, a few producers gain, customs officials and smugglers benefit“HarbergerTriangles” are small … but add up over long periods of timeTrade is often “deflected” or “redirected”Imports are often inputs, raising costsTariffs redistribute “the wrong way”Tariffs create wasteful vested interests, so hard to eliminateTariffs invite retaliation (especially with legacy of national humiliation – Chinese “Unequal Treaties” after Opium Wars)Tariffs have minor macroeconomic effects, especially with floating exchange rates (which tend to offset)
Update on Global Economy: Andrew Rose
Trade War, continued
Has it started already?No official declaration; tariffs often raised/loweredTariff increases don’talwaysinvite retaliationNixon 10% 1971 import surchargeTrump’s steel/aluminum tariffs (March)Lobbyists have removed allies (Argentina, Australia, Brazil, Canada, EU, Korea, Mexico)Stock market hates trade disruption; probably critical moderating influenceStill, WTO ignored, national security rationalization a new (low) firstBut Chinahasretaliated to steel/aluminum tariffs (April)Trump threatening further retaliation (April)China responds (April); Spiraling escalation?China’s respond carefully calibrated, restrained thus far
Update on Global Economy: Andrew Rose
US-China Trade War
China runs bilateral surplus, hence more to lose(Similar to saying one country can lose more from nuclear exchange)Hence Chinese responses targeted (pork, bourbon, soybeans, narrow body airframes, …)Can domuchmore (iPhone assembly: a national security threat?)China has higher Export/GDPHence interested in preserving WTO, rules-based trading systemAlso Chinese use of WTO helps other countries, provides soft power for China to pursue other initiatives (Taiwan, South China sea, etc.)China owns > $1 trillion of US treasuriesUnconventional weapon (harms China)
Update on Global Economy: Andrew Rose
US-China Trade War, continued
Consensus that Chinadoesviolate letter and spirit of intellectual property agreements in WTO. (Not everything Trump does is wrong!)Industrial espionage, forced licensing and joint venturesBut ineffectual response; more effective to create WTO-based coalitionTiming unfortunate; steel/aluminum were first, but are minor and divisiveIronic that TPP intended to harness China, but Trump left
Update on Global Economy: Andrew Rose
US-China Trade War, continued
As Chinese economy and trade grow, American influence recedesRemember “Nixon Shock” of 1971 tariffs, combined with VietnamBut no viable alternative to American leadership; now China (and possibly India eventually)Continuing great need for international cooperation on transnational issuesClimate ChangeTerrorismCyber-CrimeNuclear weapons (Korea, Iran)
Update on Global Economy: Andrew Rose
Korea: the Current Epi-Center
North Korean nuclear disarmament summit … ?But Trump pushing on South Korea vis-à-vis tradeTrump: KORUS “a horrible deal”But renegotiation was trivial (reduced Korean steel exports, maintain US tariffs on small trucks [that Korea doesn’t export] and raise Korean car import limits [Koreans don’t buy US cars]).Trump also irritating Japan
Update on Global Economy: Andrew Rose
Back to China
Xi’s power consolidated; political stabilityLess Concern for break-neck GDP growthLingering concerns of high debt levelsThough much because of infrastructureDebt ratios stabilizingMore concern for environmentAging population (working age population peaked in 2011)Maturing economy means more services, less manufacturingMore consumption, less investmentMeasurement and productivity issues with services
Update on Global Economy: Andrew Rose
The American-Chinese comparison: Calm!
US has good demographics (especially for a rich country)Energy independenceTechnological pre-eminenceBiotech, Nanotech, AI, ITBut China catching up fast in some areasResearch creationUniversities (in ShanghaiJioaTong University rankings,16 of top 20 universities are in US, none in China)Role of US DollarCorresponds to pre-eminent navyGeographyUS is surrounded by oceans and allies; China has 14 land borders, many disputes), spur for Belt and Road InitiativeAlliances, military, openness to foreign ideas (if notallforeigners)
Update on Global Economy: Andrew Rose
Growth rising, the universal balmContinuing tension because of large German current account surplusMostly though, EU is inward-lookingGrexit still unresolved, EMU tensionsItalian election … and new government?Serious financial issues; weak banking system and high national debtSpain has to contend with Catalan separatismRise of illiberal democracy in Hungary, PolandMigration the new key issueOnly bright spot: French reformsMacron’s rail strikes could be the tipping pointAnd then there’s the UK
Update on Global Economy: Andrew Rose
Brexit still a complete mess, decisions coming VERY soonA big long-term issueLittle visible effect thus far, but trade ties stickyProductivity still growing slowly – a BIG issue if persistentBut cyclic upturn currentlyConsequence of European upturn in business cycle?
Update on Global Economy: Andrew Rose
Summary: What to Look at in the Short Term
Trade DisputesNAFTAChinaGeopolitical Disputes of Consequence and ImmediacyKoreaIranEuropean IssuesBrexitFrench ReformsItalian GovernmentHandling illiberal democracies in Hungary, Poland
Update on Global Economy: Andrew Rose





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Some Consequences of Brexit -