There are a dizzying number of stories to follow right now, as the Trump administration tries its hand at remaking the United States in its image.
So, you could be forgiven for not realising that, according to a paper by the Bank of International Settlements, Trump has left a door to the next global economic crisis wide open.
And across Washington and the world, there are signs that his administration is about to walk through it any day now.
That door is trade protectionism. According the BIS’s annual report, the global economy faces four risks, “(i) financial cycle risks for financial stability; (ii) risks to consumption growth from household debt; (iii) risks to investment from weak productivity growth and high corporate debt; and (iv) risks from rising protectionism.”
From the report (emphasis is ours):
These risks may appear independent, but they are not. For instance, policy tightening to contain an inflation spurt could trigger, or amplify, a financial bust in the more vulnerable countries… Indeed, an overarching issue is the global economy’s sensitivity to higher interest rates given the continued accumulation of debt in relation to GDP, complicating the policy normalisation process (Graph I.1).
As another example, a withdrawal into trade protectionism could spark financial strains and make higher inflation more likely. And the emergence of systemic financial strains yet again, or simply much slower growth, could heighten the protectionist threat beyond critical levels.
Of all of those risks, protectionism is the only one a government can fully control. A government can choose to engage in global free market capitalism, or it can aggressively try to distort the market by blocking competing goods and services. It can either work amicably with neighbours and allies, or it can create tension felt across the globe.
Based on a trickle of reports over the last week or so, it seems the administration is barreling toward the latter cases.
Report the risk
The Bank of International Settlements was created by central banks to “serve as a bank for central banks.”
And in that capacity, it often releases reports about potential threats to the global economic system. Some are caused by things the world cannot avoid, like where we are in a financial cycle (are we taking on debt or paying it off?). Others, like protectionism, can be easily avoided.
But it doesn’t make them any less crippling. In this case, the BIS argues that protectionism can actually bring about the other three risks the banks mentioned. By increasing costs, and cutting off supply chains, it can hamper investment and slow down household consumption.
Let’s put this another way: The U.S. economy is built on the idea that we can find the cheapest manufacturer in the world for whatever it is we want — from steel to plastic toys. Now, you can say that this isn’t the best way to approach consumption, but if you do, you better be willing to pay more for all the stuff in your house.
As for financial cycle risks, the report says protectionism “could spark financial strains and make higher inflation more likely.”
“History shows that trade tensions can sap the global economy’s strength.”
But again, this seems like the direction in which we’re headed. Earlier this week Axios reported that the honeymoon between China and the Trump administration seems to be over. The administration is no longer holding out for China to do something about bellicose North Korea. Meanwhile, Steve Bannon is spoiling for an economic fight with the Chinese — the idea that China damaged the US economy was, after all, a pillar of Trump’s campaign.
But it isn’t just China. NAFTA negotiations look increasingly messy. The administration just held days of hearings from a dizzying number of interest groups about the issue. They were supposed to be televised, but ultimately they were not.
The sheer volume of cooks in this kitchen is making Secretary Ross’ deadline of getting negotiations done by early 2018 look more and more elusive, and that matters. Mexico is set to hold general elections in July of next year, and it’s increasingly looking like a referendum on economic freedom from the bully to the north. If Ross doesn’t make a deal before then, he may find a more hostile negotiating team on the other side of the table.
When it comes back to us
And any day now, Commerce Secretary Wilbur Ross is set to announce new tariffs on steel in the name of national security. The administration is obsessed with disrupting any of the international chains the supply America’s defence machine, no matter what the cost.
This won’t just hit China — a boogeyman of the steel industry for decades — it will hit some of America’s best allies.
Cecilia Malmström, EU trade commissioner, said that she feels that as a friend of the US, the EU is being “unfairly targeted” and that “if it hits us like it could, we will of course retaliate.”
Relations between the EU and US are now tense. On Wednesday Secretary Ross abruptly canceled a trip to Germany and gave his speech over video conference.
He was reportedly supposed to speak for ten minutes and instead spoke for twenty, so German officials — all members of Chancellor Angela Merkel’s ruling party — cut him off to cheers and applause from those in attendance.
You see, things are getting weird.
The funny thing about this is that the BIS thinks we have a window of smooth economic sailing in the short term to implement policies that will ensure that financial cycle, investment and consumption risks don’t push us into another crisis.
We are ignoring the window, instead we’re walking through the door and right into disaster.
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