American Economist Stephen Roach
Pressure on China Bad for Business
In an interview with CommonWealth Magazine, former Morgan Stanley Asia chairman Stephen Roach talks about the economic and geopolitical risks of a Trump presidency and why taking on China may not help Trump achieve his goals.
Pressure on China Bad for BusinessBy Shu-ren Koo
From CommonWealth Magazine (vol. 615 )
During his many years at Morgan Stanley, Stephen Roach was considered the most influential economist and one of the top China experts on Wall Street, and he has observed first-hand the economic relations between the United States and China.
Now a senior fellow at Yale University’s Jackson Institute for Global Affairs, Mr. Roach sees Trumponomics in a much different light than some of his more bullish former colleagues on Wall Street. In a recent interview in Connecticut, CommonWealth Magazine asked Mr. Roach for his thoughts on what a new Trump administration might mean for the U.S. and global economy, and U.S. relations with China. He contended that Trump’s economic plan was very risky considering the U.S.’s extremely low savings rate. Here are excerpts of the interview in Mr. Roach’s own words:
I think the Trump victory has been a shock, and my guess is no matter what he says it was a shock to Donald Trump as well. But it certainly was not something that investors had anticipated. Mr. Trump said a lot of very inflammatory things during the campaign, and the mistake that many made is to draw a market conclusion based on his rhetoric. I think when the shock became evident, a broad consensus of investors put aside the rhetoric immediately and focused more on the likely shifts in the policy environment, which are perceived to be very pro-business, pro-capital, and concluded that that was a strong positive for the stock market. Many have concluded it’s a strong positive for the economy. I'm not one of those. I think that the Trump plan raises very serious risk with respect to the economy, but right now that view is a minority view.
We've got to address the shortfall in output growth and the related productivity issues, and my key concern for the United States all along has been the fact that our overall national savings is remarkably low. It went negative in 2008 through 2010, and when you don’t save, you don't have enough money to fund future economic growth for investment and productivity. What worries me about the Trump Administration is they think by attacking China they can address these issues, and my fear is that not only is this a great mistake, but it doesn't help them solve the problems they need to address.
I’ll go back to the saving point. In the third quarter of 2016, which is the last quarter we have data on national savings, national savings was 3 percent of national income. That's very low. The average in the final three decades of the 20th century was 6.2 percent. And when you don't save domestically, and you want to grow, you want to invest in the future, you have to borrow surplus savings from abroad and that leads to a condition of large current account deficits that the United States has and big multilateral trade deficits, not just with China but last year we had multilateral trade deficits with 101 countries around the world.
Major Concerns for Trumponomics
And so as I look out to the Trump economic plan, I actually see larger budget deficits as do most, which will put further downward pressure on national saving, and larger current account and trade deficits, which really are in sharp conflict with the Trump administration's protectionist mood.
You raised the question is this like it was during the Reagan era? And there are two reasons that the answer is absolutely not.
Number one: While Reagan's tax policies were important in changing the mindset of many about where the U.S. economy was going to go in the 1980s, to me the biggest shift was the shift in monetary policy from an extremely tight monetary policy that was adapted to address inflation in the late 1970s and early 1980s to a very easy monetary policy. That's not going to happen this time around, so there’s not going to be the benefit of easy money. And the second thing is back to the savings point. When Ronald Reagan implemented his tax plans, the national savings rate in the United States was 7 percent. And today it's three; it's half that. So they had a lot more leeway to draw on America's reservoir of saving to fund economic growth in the Reagan era than we do right now.
The U.S-China Relationship
I think in the case of U.S. and China, we have an economic co-dependency. China certainly depends on the American consumer as an important pillar of external demand for the exports which have fueled Chinese economic growth and development for 35 years. But it's a two-way street. The U.S. depends on China to provide cheap goods that American consumers who are under a lot of income pressure desperately need. And we also depend on China to loan us surplus saving to help fund our own saving shortfall. So the miscalculation that the Trump administration is making is that we can put pressure on China because we buy their goods but they don't have any leverage to put pressure on us, and I think that's completely wrong. We can certainly expect that the Trump administration, if they put tariffs on Chinese products, China will put tariffs on our exports into China.
And what is not appreciated is the fact that China is America's third largest and most rapidly growing export market. So we need Chinese export growth to help us with our growth agenda, with our jobs agenda, and the Chinese will respond by making that more difficult. And if I’m right and budget deficits get larger because of the Trump economic plan, China will also be less willing to buy Treasuries to help us finance our budget deficit, and that will add pressures on US interest rates, which are already evident, and possibly even put downward pressure on the dollar as opposed to the fact that the dollar is now rising. So there are a lot of consequences that I don't think the incoming Trump administration is really thinking about in striking out against China.
On Moving Manufacturing Jobs Back to the U.S.
[Trump] sort of wants to deal with this on a case by case basis, whether it's Carrier or Ford Motor Company, by putting pressure on some of these producers to bring jobs back home. There's a lot of hopeful headlines that this is going to be an important part of the America First approach.
I doubt if this is going to happen. The pressures on the manufacturing sector have been evident really since the 1960s. And in an increasingly globalized environment, it's more likely than not that in some of these lower wage countries that increase their ability to manufacture will play an increasingly important role. I think the hope for U.S. manufacturing is that we can stabilize the share of output going to manufacturing but given our productivity approach, which means to continue to substitute labor for capital in our manufacturing plants, it's very unlikely that we're going to make progress in boosting manufacturing jobs, even if we hold the line on manufacturing output. It will be a more capital intensive success story than a labor intensive success story.
U.S. Leadership in Asia and the TPP
I think it's a fair point to say number one that TPP is now dead. Mr. Trump has indicated that he will move to withdraw from the agreement very early on in his new administration. I think we should be able to take him at his word on that although he changes his mind on lots of things, and maybe that won’t be the case but I think that's a fair assumption.
Number two, without the United States TPP is not going to happen. The U.S. is I think the central driver behind this relationship and it's naive for other Asian economies to think that they can move ahead with TPP in the absence of U.S. leadership. And then number three that does raise questions along with some of Mr. Trump's other sort of “America First, anti-globalization” views about what America's role is in Asia, whether it's economic or security.
He's raised questions about whether or not the United States should provide the nuclear umbrella for Japan, for South Korea that maybe they should take on the responsibilities of building their own nuclear capability. These are really shocking and potentially very destabilizing thoughts with respect to the future president and the role that America plays in providing the security umbrella for the region.
So what is America's role in Asia? Under Secretary Clinton we knew what to expect. The Asian pivot was a central feature of her tenure as secretary of state and I think she would have emphasized that in her administration. That's not going to happen. And so it doesn't look like there will be anything close to the Asian pivot. And you know Mr. Trump, I think his Asian policy will very much be driven by his aggressive approach to China. He has a thinly veiled China containment strategy. And that poses a lot of risk.
[Among those risks,] there are issues that China is involved in, whether they're in the South China Sea or now some of the tensions over the one-China policy that have emerged given the discussions with President-elect Trump and Tsai Ing-wen, you know the relationship between the U.S. and Taiwan what this means for the one-China policy. All of these are concerns.
And then there are the economic risks associated with the potential of a trade war and where that takes the U.S., China, the global economy and global financial markets. So there there's a lot of risk that's now being put into play by this more muscular approach by the United States, some of it in response to China's equally muscular approach in the South China Sea. It’s a worrisome development.
Risks and Prospects
Mr. Trump's campaign slogan “Make America Great Again” is something that he borrowed from Ronald Reagan, who had the same slogan. The rhetoric may sound the same but the economic realities are very different.
I think there's a lot of risk and uncertainty. What we need to think about is from a standpoint of financial markets that volatility is likely to be higher in the new administration. And there's a lot of geostrategic risk that needs to be taken into mind. We're not moving into a potentially stable period for the United States, its relationships with its major allies, and its impact on the broader world. And so those are negative aspects of this new Trump era, and Trump is not an isolated event, whether it’s Brexit, or the possibility of Marine Le Pen winning the presidency in France later this year. The world is raising some fundamental questions about its commitment to globalization.
And these are risks that we need to take very seriously going forward. Globalization has not been perfect by any means whatsoever. It’s put a lot of pressure on workers and on companies. It’s also produced a lot of opportunities for consumers to enjoy the benefits of the lower prices that come from globalization. So we've got to do a better job of managing the process. And you know my advice is to think long and hard about our commitment to some of these global forces in the years ahead.
[If there is a positive side to a Trump presidency,] change itself is always a powerful force, and it’s one that Mr. Trump seems to be committed to and all of us can probably benefit by thinking differently about some of the factors and the considerations that we've taken for granted over the last few years.
To the extent that change pushes us out of our comfort zone. That's uncomfortable. But that's good from the standpoint of businesses or the academic approach to policy and economic growth. We need to think differently about some of the considerations that were central to our thinking over the last 30 to 40 years.
Edited by Luke Sabatier