Monday, December 31, 2018
A chaotic Brexit could do great damage to ordinary people, as was the case with Britain's self-ejection from the Exchange Rate Mechanism of the European Monetary System in 1992. But those ordinary people will be overwhelmingly British. The days when Britain could move the world are long gone.
WASHINGTON, DC – The contours of the nineteenth and early twentieth century were defined in part by a series of consequential British foreign policy and economic decisions. As recently as 2007-2009, British policy affected global outcomes: whereas deregulation of the City of London contributed to the severity of the global financial crisis, British leadership at the London G20 summit in April 2009 ultimately proved a stabilizing influence. Today, however, despite all the political theater and dramatic rhetoric, Britain's impending exit from the European Union – Brexit – really does not matter for the world.Add to Bookmarks
The global economy may have hit a patch of uncertainty, but this is more due to the mercurial actions of US President Donald Trump, self-proclaimed "Tariff Man," who seems intent on undermining the credibility of the Federal Reserve, disrupting supply chains, and negotiating through random pronouncements. The eurozone is struggling to break out of its prolonged agonies, but the fundamental problem remains bad banking practices and potentially unsustainable public finances in some member countries. While Brexit may well prove an unfortunate idea for many inhabitants of the United Kingdom, the likely impact is lower British growth, not a significant disruption of regional, let alone global, trade.
It is hard to overstate British influence over global affairs after it became the cradle of the Industrial Revolution. From about 1750, British inventions created a wave of technological innovation that transformed how power was generated and how metal was worked. Railways and steam ships revolutionized transportation. Even when the center of innovation shifted across the Atlantic, British capital and emigration supported industrialization around the world.
But there is no question that British actions – good and bad – were consequential for many people, some of whom lived far away. British alliances and willingness to intervene militarily shaped European wars, from Napoleon through the German invasions of France in 1870, 1914, and 1940. Neville Chamberlain's policy of appeasement – including his personal strategy and decisions at the 1938 Munich conference with Adolf Hitler – had a major impact on the timing, nature, and perhaps even the eventual outcome of World War II.
The UK's peak global influence was probably in 1940-1941, when it stood essentially alone against the seemingly unstoppable might of Nazi Germany. Ironically, America's entry into the war both tipped the balance decisively against Hitler and soon led to a complete makeover of the world economy.
The 1944 Bretton Woods conference made it clear that the era of European empire was over. Also gone was privileged trade within economic zones established by previous waves of imperial expansion. Post-World War II trading arrangements were determined by American preferences. With US business, labor, and politicians unanimous in wanting access to all markets, successive rounds of trade liberalization followed.
In 1945, the British Empire contained more than 600 million people, about one-quarter of everyone alive, making it (briefly) the most populous political entity ever on the planet. In subsequent decades, the UK's global impact was felt mostly through a combination of decolonization debacles, including the spectacular humiliation suffered during the Suez Crisis of 1956, and gross macroeconomic mismanagement. In 1976, Britain became the only country issuing an international reserve currency that has been forced to borrow from the International Monetary Fund during the (post-1973) era of floating exchange rates.
Nothing about this loss of global influence can be attributed to Britain's membership of the EU. Overall, Britain has done well from post-war trade, about half of which is currently with Europe. The UK's total trade (exports plus imports) was around 40% of GDP during the 1950s; it currently runs closer to 60%, with most of that increase occurring after the country joined the European Economic Community in 1973. More broadly, active participation in the global economy over the past four decades has helped close the gap (in terms of GDP per capita) with the United States.
Perhaps there is a mad version of Brexit that could have ramifications beyond British shores, but that seems far-fetched. Unlike Trump, no responsible politician in the UK really wants to restore protectionist tariffs to the level of the 1930s. Also unlike the US, no prominent official in Britain is keen to gamble again with the country's future by weakening financial regulation.
Most of the British political elite seems just as out of touch with global reality as their predecessors were in 1938, 1944, and 1956. The world has moved on, again. A chaotic Brexit could do great damage to ordinary people – as was the case with Britain's self-ejection from the Exchange Rate Mechanism of the European Monetary System in 1992.
But those ordinary people will be overwhelmingly British. The days when Britain could move the world are long gone.1
Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters
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Anyone who says to you: 'Believe me, I have no prejudices,' is either succeeding in deceiving himself or trying to deceive you. ... [I]n the social sciences, first, the subject-matter has much greater political and ideological content, so that other loyalties are also involved; and secondly, because the appeal to 'public experience' can never be decisive, as it is for the laboratory scientists who can repeat each other's experiments under controlled conditions, the social scientists are always left with a loophole to escape through - 'the consequences that have followed from the causes that I analysed are, I agree, the opposite of what I predicted, but they would have been still greater if those causes had not operated'.Robinson then turns to quoting Adam Smith on poets and mathematicians:
This need to rely on judgement has another consequence. It has sometimes been remarked that economists are more queazy and ill-natured than other scientists. The reason is that, when a writer's personal judgement is involved in an argument, disagreement is insulting.
Adam Smith [in the Moral Sentiments] remarks upon the different temperaments of poets and mathematicians:Robinson then sums up:
"The beauty of poetry is a matter of such nicety, that a young beginner can scarce ever be certain that he has attained it. Nothing delights him so much, therefore, as the favourable judgements of his friends and of the public; and nothing mortifies him so severely as the contrary. The one establishes, the other shakes, the good opinion which he is anxious to entertain concerning his own performances.
"Mathematicians, on the contrary, who may have the most perfect assurance, both of the truth and of the importance of their discoveries, are frequently very indifferent about the reception which they may meet with from the "public. . . .
"[They] from their independency upon the public opinion, have little temptation to form themselves into factions and cabals, either for the support of their own reputation, or for the depression of that of their rivals. They are almost always men of the most amiable simplicity of manners, who live in good harmony with one another, are the friends of one another's reputation, enter into no intrigue in order to secure the public applause, but are pleased when their works are approved of, without being either much vexed or very angry when they are neglected.
"It is not always the same case with poets, or with those who value themselves upon what is called fine writing. They are very apt to divide themselves into a sort of literary factions; each cabal being often avowedly and almost always secretly, the mortal enemy of the reputation of every other, and employing' all the mean arts of intrigue and solicitation to preoccupy the public opinion in favour of the works of its own members, and against those of its enemies and rivals."
Perhaps Adam Smith had rather too exalted a view of mathematicians, and perhaps economists are not quite as bad as poets; but his main point applies. The lack of an agreed and accepted method for eliminating errors introduces a personal element into economic controversies which is another hazard on top of all the rest. There is a notable exception to prove the rule. Keynes was singularly free and generous because he valued no one's opinion above his own. If someone disagreed with him, it was they who were being silly; he had no cause to get peevish about it.
The personal problem is a by-product of the main difficulty, that, lacking the experimental method, economists are not strictly enough compelled to reduce metaphysical concepts to falsifiable terms and cannot compel each other to agree as to what has been falsified. So economics limps along with one foot in untested hypotheses and the other in untestable slogans."
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Anne Stevenson-Yang is co-founder and research director of J Capital Research Ltd., a provider of investment advisory services.
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The Trump administration's willingness to push the Chinese harder on trade has struck a bilateral chord. Beijing is listening. So far, so good. Now the question is what the U.S. wants to achieve. Answer: the total destruction of China as a competitor.
That isn't a trade goal, and the demands being made contradict one another. This aim also unnecessarily awakens Beijing's deepest nationalist fears.
Unsure what to offer next – and convinced that the U.S. effectively persuaded Canada to take an executive at Huawei Technologies Co. hostage – China is falling back on familiar jingoistic strategies and rhetoric. Things are likely to get much worse from here.
Meanwhile, the U.S. economy is incurring pain that the Trump administration seeks to alleviate with a $12 billion bailout program to aid farmers. Pain may be worth enduring if something is being accomplished. But the only likely outcome is a reduction in trade and more expensive Chinese products. In other words, fat taxes on the American consumer.
Over the past few months, Chinese imports from the U.S. have dropped sharply, declining 25 percent in November, even as its exports to the U.S. continued to rise. The big falloff started in July, after Washington implemented the first list of China-specific tariffs.
Two Roads Diverged
China's imports from the U.S. have fallen amid the trade war, while its exports there keep rising
Source: Customs General Administration of China
The majority of U.S. firms polled by the American Chamber of Commerce in Shanghai reported that the trade war has hurt their profits and that non-trade barriers have increased. The policies, if anything, have supported more offshoring: 31 percent of the respondents said they were looking to assemble or source components outside the U.S. There is no evidence that cybersecurity or intellectual-property protections have improved for U.S. companies.
That's a big turnaround in sentiment from years past. So why the change of heart?
China started its economic opening with an all-fronts offensive to charm foreign businesses. Politburo members were told to doff Mao suits and put on ties and jackets. Beijing and Shanghai built luxurious hotels at the end of highways that led straight from their airports: Foreign investors never needed to encounter the inconveniences of China proper.
By the 1990s, every third-string corporate delegation from the U.S. hoping to manufacture ball bearings or Barbie dolls in China was given an audience with the top political leadership, and those of us working there met constantly with government representatives. It's no wonder that American corporations believed the country was on a trajectory toward better market access, more transparency and fairer competition.
A key turning point came when China discovered public markets. The decade between 2000 and 2010 was a heyday for Chinese IPOs – especially for state-owned enterprises, for which public markets seemed like a bottomless and benevolent well of cash. After Hu Jintao assumed leadership in 2003, he dispensed with all the government meetings for foreigners.
Another decisive moment was 2008, when the nation's measures to secure an optically triumphant Olympics established the machinery for tighter information control. That came in handy as the global financial crisis hit. With infrastructure stimulus appearing to rescue the economy, Beijing became convinced of the country's exceptionalism – a hubris that only affirmed the success of China's authoritarian model, and led to a new era of assertiveness.
In this way, China lost the support of foreign businesspeople, who have become disillusioned with the market, tired of the pollution, and now fear for their physical safety. (The detention of three Canadians in retaliation for the Huawei arrest looks like pure thuggery.)
Initially, it was startling and encouraging that a U.S. administration was finally willing to call China's bluff. Problems in bilateral trade genuinely run deep, and Beijing has a coordinated strategy of stealing U.S. technology and evading American export-control laws. Market access has in many ways deteriorated since the country joined the World Trade Organization in 2001 and made sweeping commitments to open up. The country subsidizes industries that then gain unfair advantages against competing foreign products.
But the Trump administration's attempt to address these problems isn't working. Its trade positions conflict with one another, and despite various theories, no one is entirely sure who speaks for the U.S. President Donald Trump started off by demanding that China reduce its trade surplus with the U.S. by $200 billion and threatened a series of tariffs on its goods. The U.S. trade representative is pushing forward a Section 301 action to address intellectual-property theft, while also claiming to be working to encourage "reshoring" by U.S. firms. The Department of Defense is focused on cyber-strategy; the Department of Commerce on export controls; the FBI on non-traditional espionage. In other words, there is a litany of complaints whose basic target is the whole Chinese economic and political system.
Many of these goals are incompatible. Enforcing U.S. export controls will necessarily decrease its shipments to China and therefore increase the trade deficit. U.S. tariffs, and the inevitable retaliation, are a disincentive to reshoring, as they raise costs. Enforcing intellectual-property laws promotes import substitution. None of this is to say that the laws shouldn't be enforced; the administration just needs to be clear on its goals.
There are a few ways the U.S. could adopt a constructive approach without relinquishing (most of) its goals.
Focus on intellectual-property theft: Drop demands about the trade deficit and firmly pursue IP enforcement and market-access demands. U.S. Trade Representative Robert Lighthizer is by far the most experienced and capable negotiator on the U.S. side. Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, and Trump should step out of the process.
Go after China's red aristocracy: The high-alarm reaction to Huawei Chief Financial Officer Meng Wanzhou's arrest is a clear sign that the country's blooded elite are the third rail of diplomacy. A more active Treasury Department focus on Chinese money laundering; more stringent enforcement of export controls; and swift sanctions on the country's sales to Iran and North Korea are important pressure points.
Strengthen CFIUS: The U.S. needs to trade access to its own market for entry to China's, especially in financial services. More stringent investment reviews via the Committee on Foreign Investment in the U.S. can be used as leverage.
China's political leadership rules at the pleasure of its military and security forces, a fact poorly appreciated in the U.S. Beijing's more regressive and nativist powers are held at bay when the country demonstrates strength, and even bellicosity. The Trump stance could easily trigger a backlash for which the U.S. is ill-prepared.
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