The IMF estimates that the formation of a US bloc and a Chinese bloc could reduce global output by up to 2%.
Five years after a once-unthinkable trade war with China, US Treasury Secretary Janet Yellen chose her words carefully on April 20th. In a wide-ranging speech, he reversed the terms of US engagement with China, prioritizing national security concerns over economic considerations.
This formally ended a 40-year emphasis on economics and trade as the foundation for the world’s most important bilateral relationship. Yellen’s position on security was almost confrontational: "We will not compromise on these concerns, even when they compel compromises with our economic interests".
Yellen’s view is in line with the anti-China sentiment that has now gripped the United States.
China’s accession to the World Trade Organization in 2001 achieved the greatest legitimacy in this regard: the United States has opened up its markets, but China has allegedly broken its promise to become more like America. The American opening, according to the United States, was not followed by Chinese reciprocity. And this has created a lot of internal friction in the States.
President Joe Biden issued an executive order which will impose restrictions on foreign direct investment (FDI) by US firms in some sensitive technologies in China, such as artificial intelligence and quantum computing. The United States rejects the Chinese claim that these measures aim to stifle Chinese development. Like the sanctions against Chinese telecom giant Huawei and those being considered against the TikTok app, this too is being justified under the amorphous guise of national security.
The case of the United States is not based on concrete evidence, but on the presumption of nefarious intent linked to the development of military technologies but also with civilian uses by China. Yet the US is grappling with low investment in innovation and the real and imagined threats of Chinese technology.
Significantly, Yellen’s speech put both superpowers on an equal footing. At the 20th National Congress of the Communist Party last October, Chinese President Xi Jinping’s opening message drew attention to national security. With both countries equally fearful of the security threat each poses to the other, the shift from engagement to confrontation is mutual.
Yellen is absolutely correct in framing this change as a compromise. But he only hinted at the economic consequences of the conflict. Quantifying these consequences is not easy.
A study just published by the International Monetary Fund (summarized in World Economic Outlook of April 2023) makes a first analysis aimed at identifying the costs. IMF economists see the problem through the lens of reducing cross-border flows of goods and capital, reflected in geostrategic "reshoring" strategies and what Yellen herself has called "friend-shoring".
These actions result in a fragmentation of the IDE into two opposing blocks. The IMF estimates that the formation of a US bloc and a Chinese bloc could reduce global output by up to 2% in the long run. As the world’s largest economy, America will account for a significant share of lost output.
The President of the European Central Bank Christine Lagarde recently pointed out a different channel through which an escalation of the US-China conflict could adversely affect economic performance. The ECB study concludes that the geostrategic conflict could increase inflation by up to 5% in the short run and by around 1% in the long run. Side effects on monetary policy and financial stability would follow.
Collectively, these model-based calculations of the costs of conflict imply a stagflatory combination of lower output and higher inflation.
Yet there is one important aspect for the United States: a chronic domestic savings deficit casts the economic consequences of the conflict with China in a very different light. In 2022, the US net saving - the depreciation-adjusted saving of households, businesses and of the government sector - fell to just 1.6% of national income, much below the 5.8% long-term average from 1960 to 2020. Lacking savings and wanting to invest and grow, the United States takes full advantage of the world’s dominant dollar as reserve currency and freely imports excess savings from abroad, running a huge current account and multilateral trade deficit to attract foreign capital.
As such, America’s economic interests are closely aligned with its imbalances in trade balance and capital flows. Barring a highly unlikely resurgence of US domestic savings, compromising those flows for any reason – for example, security concerns over China – is not without significant economic and financial consequences. The research cited above suggests that those consequences will take the form of slower economic growth, higher inflation and perhaps a weaker dollar.
This is hardly an ideal outcome for a US economy already in a precarious point in the business cycle. The national security compromise should not be taken lightly. Nor should the US penchant for overestimating the security threat be taken on blind faith.
Original article published on Money.it Italy 2023-05-18 07:57:10. Original title: Perché agli Stati Uniti non conviene uno scontro con la Cina?
