MACROSCOPE
Macroscope
by

Don’t expect US, Russia and China’s emerging superpower club to help global recovery

President-elect Trump’s ‘America first’ policies would ensure that closer ties between the three countries are to the detriment of everyone else

PUBLISHED : Monday, 21 November, 2016, 9:38am
UPDATED : Monday, 21 November, 2016, 10:39pm

Forget about BRICS, NATO, NAFTA, G7 and IMF as there is a new superpower kid on the bloc and its star will be rising as other bodies start to fade in importance.

The election of Donald Trump as next US president has sent reverberations around the world. The tectonic plates of international accord are already shifting and new allegiances taking shape.

One of the clearest trends to emerge so far is the stream of warm words between Donald Trump and Russian President Vladimir Putin. It is a positive sign that the two former Cold War warrior nations may be ready to bury the hatchet and usher in a new era of closer co-operation. There have also been positive responses from China to Trump’s election. It all sounds auspicious so far.

Trump has already shown his scorn for the NATO alliance and is prepared to tear up trade treaties like NAFTA and the hard-fought Trans-Pacific Partnership (TPP)

It could mark the first signs of a new superpower club emerging called ARC – with America, Russia and China forming much closer diplomatic ties after years of political frostiness. The fall-out from the Crimea crisis with Russia and US trade frictions with Beijing have not served the purpose of global geo-political tensions too well during recent years. Any detente on the political front should be seen as a positive step for the world.

The key question for the world economy is whether it will make any difference to the outlook for global recovery. Could the combined economic might of America, Russia and China acting together provide a better chance of global revival? If ARC bypasses the traditional channels of global economic co-operation and harmonisation the answer is probably no.

The record of supranational bodies like the IMF, G7, OECD, WTO and BIS has left much to be desired in recent years, especially after the 2008 global financial crisis. In the event, world economic doom was largely averted thanks to unilateral actions of fiscal and monetary super-stimulus in the US, UK, Japan and Europe. But at least the international super-forums kept the lines of policy communication open to encourage the stimulus taps to be left wide open.

The worry about Trump is that his much-lauded ‘America-first’ policies could be a backward step away from international co-operation, with America retreating back into its shell of domestic issues. Trump’s bid to create 25 million new jobs, double US GDP growth and cut the tax burden sounds great in theory. But in practise it will open up old wounds that the US economy is still recovering from 30 years on from the tax-cutting, supply-side boosting Reaganomics debacle.

Under the stewardship of US President Ronald Reagan during the 1980s, Reaganomics created a three–headed monster – the Super-dollar and the gaping black holes of the trade and budget deficits. It marked the start of the US manufacturing flight to lower cost production centres in Asia and triggered a surge in US and global bond yields. We are already seeing early ripple effects hitting global markets since the election. It will get worse.

The risks are that, uncontested, Trump will create a lopsided, bi-polar global recovery - strong growth in the US, with China feeding off the US’s growing appetite for imports, leaving weaker recovery in the rest of the world burdened down by rising interest rates and surging bond yields.

Trump has already shown his scorn for the NATO alliance and is prepared to tear up trade treaties like NAFTA and the hard-fought Trans-Pacific Partnership (TPP) if they are deemed not to be in the US’s best interest. It could set in motion a very dangerous escalation of global trade hostilities at the worst possible moment for the world’s economic well-being.

This could signal the beginning of the end for globalisation and multinational accord. It could mark the start of a new regional ascendance where the US, China and Russia are left to be ‘masters of their own universes’. If the US withdraws from the TPP it could end up snubbing its long-time allies in Asia such as Japan, South Korea and Japan.

This could be good news for China in the short term, if China is left with a free hand to dominate a new free trade zone in Asia-Pacific of its own design. But not in the long run if global growth starts to deteriorate under Trump’s ‘brave new world’ vision.

Ego-tripping with the big boys of the global economy may be one thing, but Trump needs to show strong leadership with all the world’s policymakers to bolster global recovery, not wreck it. ARC will never spark super-recovery. It will only scupper it.

David Brown is chief executive of New View Economics

business-article-page