What Xi and Biden forgot to mention about the economy

Author: Tom Westland, ANU

According to the official reading, during their virtual summit this week, US President Joe Biden and Chinese President Xi Jinping discussed “managing competition responsibly”. For Biden, the talks provided an opportunity to put pressure on Xi over China’s actions in Hong Kong and its assertive position in the Taiwan Strait, as well as human rights violations in Xinjiang. Xi, for his part, warned Biden against leading the United States into a new Cold War against China.

The agenda was missing any serious discussion of the issues facing the global economy as it recovers from the deep recession of 2020.

Aside from a few worthy breakthroughs, like the agreement to hold bilateral “stability” talks on nuclear issues, it’s unclear what the responsibly managed competition of Xi and Biden will look like. If this sounds anything like managed commerce that now governs the economic interactions of the world’s two largest economies, then “competition” is a misnomer. The trade war between the two countries, and the ensuing “Phase 1” trade deal, represent the worst type of anti-competitive political ruse, designed to protect politically favored industries in the United States and to expel farmers and workers. Australian and Canadian gas suppliers who can produce more efficiently than their US counterparts. In economics as in sport, competition is best managed by neutral referees, and not by the participants themselves.

The failure of the two presidents to discuss what they could do to support the economic recovery is a big missed opportunity. There is a desperate need for bolder leadership that tackles short-term pressures and – just as important – longer-term structural fault lines. The global economy looked decidedly unhealthy even before COVID-19 hit. The Brexit referendum in June 2016 and the election of a protectionist populist to the White House later in the year marked the beginning of a withdrawal into advanced economies. The yield curve for U.S. Treasuries inverted in May 2019, generally a reasonably reliable harbinger of recession. The structural damage to the global economy inflicted by Britain’s exit from the European Union and the tariffs put in place under President Trump has been masked by the much greater immediate destruction caused by the pandemic, but as as the recovery accelerates, it will become increasingly difficult to ignore.

Although the Biden administration has more or less made peace, albeit on bad terms, with Europe – lifting Trump-era tariffs but imposing quotas on exports of steel and aluminum from the bloc – she stuck to Trump’s belligerent stance towards China. It has maintained tariffs on a large chunk of Chinese imports and continues to curb semiconductor exports in the name of national security – though the likely long-term effect will simply be to boost semiconductor manufacturing. elsewhere.

The effect of these two policies is to restrict the supply of consumer goods in the United States. This is not the only reason the United States has had the highest rate of inflation since George Bush Sr. was president. Compared to the “big resignation” of workers unwilling to return to low-paying jobs and logistical problems at American ports, this is an easily resolved problem – at least in theory. The domestic policy of removing Trump tariffs could be tricky, but Biden could use his power to issue broad exemptions that would make tariffs a dead letter. Biden will also remember the political fate of the last two single-term presidents, both of whom presided over economic contractions resulting in part from tightening monetary policy in the face of inflationary pressures.

Inflationary pressures, in the United States and elsewhere in the global economy, may be only temporary, and for the most part central bankers choose not to overreact by rushing rate hikes and stifling economic recovery. . But the task is made more difficult by senseless trade restrictions that have brought no tangible security or economic benefit to the countries that impose them. Since the dismantling of the Corn Laws, economists know that removing barriers to international trade lowers prices; politicians, however, captured by vested interests, often have to be made to scream and kick to acknowledge it.

Even if he only scratched the surface at the summit, President Xi and his advisers would be well aware of the possible impact on the Chinese economy of a tightening of policies in the United States and in d Other advanced economies: Among other things, a depreciation of the yuan, which would make it harder for Chinese borrowers, like struggling real estate giant Evergrande, to service their dollar-denominated debts. If Trump had won last year’s election, he might have gloated over the Chinese economy’s hard landing: Biden’s team is smart enough to know that a recession in China would end also the breath to the world economy.

The failure of the two presidents to come up with a strategy to pull the world out of the economic slump at their summit is perhaps hardly surprising, given the political constraints, but it is a major missed opportunity. Australia, and the world in general, is best served by managed political and economic cooperation between Chinese and American leaders and intense business competition between their companies.

Instead, despite the small victories at the top, we appear to be in line for more political competition and business collusion. The tough heads of Asian capitals should not be fooled by political thugs offering managed business solutions in Washington or Beijing.

Tom Westland is Research Director of the Asian Bureau of Economic Research at the Crawford School of Public Policy at Australian National University.

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