The Myth of Sound Fundamentals

February 26, 2018

The Myth of Sound Fundamentals

by Stephen S.Roach*

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The recent correction in the US stock market is now being characterized as a fleeting aberration – a volatility shock – in what is still deemed to be a very accommodating investment climate. In fact, for a US economy that has a razor-thin cushion of saving, dependence on rising asset prices has never been more obvious.

NEW HAVEN – The spin is all too predictable. With the US stock market clawing its way back from the sharp correction of early February, the mindless mantra of the great bull market has returned. The recent correction is now being characterized as a fleeting aberration – a volatility shock – in what is still deemed to be a very accommodating investment climate. After all, the argument goes, economic fundamentals – not just in the United States, but worldwide – haven’t been this good in a long, long time.But are the fundamentals really that sound? For a US economy that has a razor-thin cushion of saving, nothing could be further from the truth. America’s net national saving rate – the sum of saving by businesses, households, and the government sector – stood at just 2.1% of national income in the third quarter of 2017. That is only one-third the 6.3% average that prevailed in the final three decades of the twentieth century.

It is important to think about saving in “net” terms, which excludes the depreciation of obsolete or worn-out capacity in order to assess how much the economy is putting aside to fund the expansion of productive capacity. Net saving represents today’s investment in the future, and the bottom line for America is that it is saving next to nothing.

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Alas, the story doesn’t end there. To finance consumption and growth, the US borrows surplus saving from abroad to compensate for the domestic shortfall. All that borrowing implies a large balance-of-payments deficit with the rest of the world, which spawns an equally large trade deficit. While President Donald Trump’s administration is hardly responsible for this sad state of affairs, its policies are about to make a tough situation far worse.

Under the guise of tax reform, late last year Trump signed legislation that will increase the federal budget deficit by $1.5 trillion over the next decade. And now the US Congress, in its infinite wisdom, has upped the ante by another $300 billion in the latest deal to avert a government shutdown. Never mind that deficit spending makes no sense when the economy is nearing full employment: this sharp widening of the federal deficit is enough, by itself, to push the already-low net national saving rate toward zero. And it’s not just the government’s red ink that is so troublesome. The personal saving rate fell to 2.4% of disposable (after-tax) income in December 2017, the lowest in 12 years and only about a quarter of the 9.3% average that prevailed over the final three decades of the twentieth century.

As domestic saving plunges, the US has two options – a reduction in investment and the economic growth it supports, or increased borrowing of surplus saving from abroad. Over the past 35 years, America has consistently opted for the latter, running balance-of-payments deficits every year since 1982 (with a minor exception in 1991, reflecting foreign contributions for US military expenses in the Gulf War). With these deficits, of course, come equally chronic trade deficits with a broad cross-section of America’s foreign partners. Astonishingly, in 2017, the US ran trade deficits with 102 countries.

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The multilateral foreign-trade deficits of a saving-short US economy set the stage for perhaps the most egregious policy blunder being committed by the Trump administration: a shift toward protectionism. Further compression of an already-weak domestic saving position spells growing current-account and trade deficits – a fundamental axiom of macroeconomics that the US never seems to appreciate.

Attempting to solve a multilateral imbalance with bilateral tariffs directed mainly at China, such as those just imposed on solar panels and washing machines in January, doesn’t add up. And, given the growing likelihood of additional trade barriers – as suggested by the US Commerce Department’s recent recommendations of high tariffs on aluminum and steel – the combination of protectionism and ever-widening trade imbalances becomes all the more problematic for a US economy set to become even more dependent on foreign capital. Far from sound, the fundamentals of a saving-short US economy look shakier than ever.

Lacking a cushion of solid support from income generation, the lack of saving also leaves the US far more beholden to fickle asset markets than might otherwise be the case. That’s especially true of American consumers who have relied on appreciation of equity holdings and home values to support over-extended lifestyles. It is also the case for the US Federal Reserve, which has turned to unconventional monetary policies to support the real economy via so-called wealth effects. And, of course, foreign investors are acutely sensitive to relative returns on assets – the US versus other markets – as well as the translation of those returns into their home currencies.

Driven by the momentum of trends in employment, industrial production, consumer sentiment, and corporate earnings, the case for sound fundamentals plays like a broken record during periods of financial market volatility. But momentum and fundamentals are two very different things. Momentum can be fleeting, especially for a saving-short US economy that is consuming the seed corn of future prosperity. With dysfunctional policies pointing to a further compression of saving in the years ahead, the myth of sound US fundamentals has never rung more hollow.

Stephen S. Roach

*Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.


The Lessons of Black Monday

February 13, 2018

The Lessons of Black Monday

by Barry Eichengreen

“Will Trump respond like FDR in 1933, reassuring the public that the only thing we have to fear is fear itself? Or will he look for someone to blame for the collapse in his favorite economic indicator and lash out at the Democrats, foreign governments, and the Fed? A president who plays the blame game would only further aggravate the problem.”-Barry Eichengreen
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When interpreting sharp drops  in stock prices and their impact, many will think back to 2008 and the market turbulence surrounding Lehman Brothers’ bankruptcy filing. But a better historical precedent for current conditions is the huge one-day drop on October 19, 1987.


BERKELEY – US President Donald Trump has regularly pointed to the stock market as a source of validation of his administration’s economic program. But, while the Dow Jones Industrial Average (DJIA) has risen by roughly 30% since Trump’s inauguration, the extent to which the market’s rise was due to the president’s policies is uncertain. What is certain, as we have recently been reminded, is that what goes up can come down.

When interpreting sharp drops in stock prices and their impact, many will think back to 2008 and the market turbulence surrounding Lehman Brothers’ bankruptcy filing. But a better historical precedent for current conditions is Black Monday: October 19, 1987.

Black Monday was a big deal: the 22.6% price collapse is still the largest one-day percentage drop in the DJIA on record. The equivalent today would be – wait for it – 6,000 points on the Dow.

In addition, the 1987 crash occurred against the backdrop of monetary-policy tightening by the US Federal Reserve. Between January and October 1987, the Fed pushed up the effective federal funds rate by nearly 100 basis points, making it more expensive to borrow and purchase shares. In the run-up to October 2008, by contrast, interest rates fell sharply, reflecting a deteriorating economy. That is hardly the case now, of course, which makes 1987 the better analogy.

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Treasury Secretary Steven Mnuchin

The 1987 crash also occurred in a period of dollar weakness. Late in the preceding week, Treasury Secretary James Baker made some remarks that were interpreted as a threat to devalue the dollar. Like current Treasury Secretary Steven Mnuchin at Davos this year, Baker could complain that his comments were taken out of context. But it is revealing that the sell-off on Black Monday began overseas, in countries likely to be adversely affected by a weak dollar, before spreading to the US.

Finally, algorithmic trading played a role. The algorithms in question, developed at the University of California, Berkeley, were known as “portfolio insurance.” Using computer modeling to optimize stock-to-cash ratios, portfolio insurance told investors to reduce the weight on stocks in falling markets as a way of limiting downside risk. These models thus encouraged investors to sell into a weak market, amplifying price swings.

Although the role of portfolio insurance is disputed, it’s hard to see how the market could have fallen by such a large amount without its influence. Twenty-first-century algorithmic trading may be more complex, but it, too, has unintended consequences, and it, too, can amplify volatility.

Despite all the drama on Wall Street in 1987, the impact on economic activity was muted. Consumer spending dropped sharply in October, owing to negative wealth effects and heightened uncertainty, but it quickly stabilized and recovered, while investment spending remained essentially unchanged.

What accounted for the limited fallout? First, the Fed, under its brand-new chairman, Alan Greenspan, loosened monetary policy, reassuring investors that the crash would not create serious liquidity problems. Market volatility declined, as did the associated uncertainty, buttressing consumer confidence.

Second, the crash did not destabilize systemically important financial institutions. The big money-center banks had used the five years since the outbreak of the Latin American debt crisis to strengthen their balance sheets. Although the Savings & Loan crisis continued to simmer, S&Ls were too small, even as a group, for their troubles to impact the economy significantly.

What, then, would be the effects of an analogous crash today? Currently, the US banking system looks sufficiently robust to absorb the strain. But we know that banks that are healthy when the market is rising can quickly fall sick when it reverses. Congressional moves to weaken the Dodd-Frank Act, relieving many banks of the requirement to undergo regular stress testing, suggest that this robust health shouldn’t be taken for granted.

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Donald Trump’s cameo in the new movie Wall Street: Money Never Sleeps

Moreover, there is less room to cut interest rates today than in 1987, when the fed funds rate exceeded 6% and the prime rate charged by big banks was above 9%. To be sure, if the market fell sharply, the Fed would activate the “Greenspan-Bernanke Put,” providing large amounts of liquidity to distressed intermediaries. But whether Jay Powell’s Fed would respond as creatively as Bernanke’s in 2008 – providing “back-to-back” loans to non-member banks in distress, for example – is an open question.

Much will hinge, finally, on the president’s reaction. Will Trump respond like FDR in 1933, reassuring the public that the only thing we have to fear is fear itself? Or will he look for someone to blame for the collapse in his favorite economic indicator and lash out at the Democrats, foreign governments, and the Fed? A president who plays the blame game would only further aggravate the problem.


Has Trumphoria Finally Hit a Wall?

February 6, 2018

Has Trumphoria Hit a Wall?Paul Krugman

When talking about stock markets, there are three rules you have to remember. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.

So the market plunge of the past few days might mean nothing at all. On one side, don’t assume that there was a good reason for the slide (although the fact that the Dow fell 666 points on Friday hints either at satanic forces or at some mystical link with the Kushner family’s bum investment at 666 Fifth Avenue). When stocks crashed in 1987, the economist Robert Shiller carried out a real-time survey of investor motivations; it turned out that the crash was essentially a pure self-fulfilling panic. People weren’t selling because some news item caused them to revise their views about stock values; they sold because they saw that other people were selling.

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And on the other side, don’t assume that the stock price decline tells us much about the economic future, either. The great economist Paul Samuelson famously quipped that the stock market had predicted nine of the past five recessions. That 1987 crash, for example, was followed not by a recession, but by solid growth.

Still, market turmoil should make us take a hard look at the economy’s prospects. And what the data say, I’d argue, is that at the very least America is heading for a downshift in its growth rate; the available evidence suggests that growth over the next decade will be something like 1.5 percent a year, not the 3 percent Donald Trump and his minions keep promising.

There are also suggestions in the data that risky assets in general — stocks, but also long-term bonds and real estate — may be overpriced. Leaving Bitcoin madness aside, we’re not talking dot-coms in 2000 or houses in 2006. But standard indicators are well above historically normal levels, and a reversion toward those norms could be painful.

About that plummet: If there was any news item behind it, it was Friday’s employment report, which showed a significant although not huge rise in wages. Now, rising wages are a good thing. In fact, the failure of wages to rise much until now has been a deeply frustrating deficiency in the otherwise impressively durable economic recovery that began early in the Obama administration.

But we’re now seeing fairly strong evidence that the U.S. economy is nearing full employment. The low measured unemployment rate is only part of the story. There’s also the growing willingness of workers to quit their jobs, something they don’t do unless they’re confident of finding new employment. And now wages are finally rising, suggesting that workers are gaining bargaining power, too.

Again, this is all good news. But it does mean that future U.S. growth can’t come from putting the unemployed back to work. It has to come either from growth in the pool of potential workers or from rising productivity, that is, more output per worker.

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Did the markets believe Trump? At the very least, they’ve been acting as if the U.S. economy still had lots of room to run; throwing cold water on that belief should mean both higher interest rates and lower stock prices, which is what we’re seeing.

But should we be worried about something worse than a mere downshift in growth? Well, asset prices do look high: A widely used gauge of stock valuations puts them at a 15-year high, while a conceptually similar measure says that housing prices have retraced a bit less than half the rise that culminated in the great housing bust.

Individually, these numbers aren’t that alarming: Stocks, as I said, don’t look nearly as overvalued as they did in 2000, housing not nearly as overvalued as it was in 2006. On the other hand, this time both markets look overvalued at the same time, at least raising the possibility of a double-bubble burst like the one that hit Japan at the end of the 1980s.

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Fed Chairman Jerome ‘Jay’ Powell– How well he would handle a crisis if one developed, asks Dr. Krugman

And if asset prices take a hit, we might expect consumers — who have been spending heavily and saving very little — to pull back. Still, all of this would be manageable if key policymakers could be counted on to act effectively. Which is where I get worried.

It’s surely not a good thing that Trump got rid of one of the most distinguished Federal Reserve chairs in history just before markets started to flash some warning signs. Jerome Powell, Janet Yellen’s replacement, seems like a reasonable guy. But we have no idea how well he would handle a crisis if one developed.

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Secretary of the Treasury–Steven Mnuchin

Meanwhile, the current Secretary of the Treasury — who declared of Davos, “I don’t think it’s a hangout for globalists” — may be the least distinguished, least informed individual ever to hold that position.

So are we heading for trouble? Too soon to tell. But if we are, rest assured that we’ll have the worst possible people on the case.

Image result for Paul KrugmanDr. Paul Krugman


Trump’s Foreign Policy Priorities in 2018 and beyond

January 29, 2018

Trump’s Foreign Policy Priorities in 2018 and beyond

by Sheila A Smith, CFR

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“The central role given to US economic priorities is striking, with an emphasis on renegotiating trade agreements and on reducing the country’s trade deficit.”–Sheila A Smith

On 18 December 2017, Trump’s National Security Strategy offered the first glimpse of his translation of ‘America First’ rhetoric into policy priorities. The central role given to US economic priorities is striking, with an emphasis on renegotiating trade agreements and on reducing the country’s trade deficit. But the actual practice of Trump’s approach to Asia — while differing in rhetoric from the previous administration — suggests the possibility of continuity rather than change.


In his first year in office, Trump was largely reactive rather than proactive with respect to world affairs. Washington’s response to Pyongyang’s growing missile threat is to bolster allied defences and extended deterrence while it builds a coalition of international pressure on the regime to return to the negotiating table. UN economic sanctions (via the United Nations itself as well as via a growing appetite for secondary sanctions) are the primary mechanism of coercion. Kim Jong-un seems determined to be able to strike the continental United States, so the North Korea problem remains at the top of the Trump administration’s priority list.

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The Harry S. Truman Department of State Building, near The George Washington University’s Lloyd Hartman Eliot School of International Affairs, Washington D.C.

The administration is woefully understaffed for the challenges that face the United States. The President’s tweets confound efforts to communicate policy, and the White House’s protracted effort to undermine the Secretary of State ensures that US diplomacy is weak. The administration has been slow to make appointments to high-level foreign policy posts, with the notable exception of the Department of Defense. The lack of expertise on the complex array of foreign policy challenges confronting Washington has left the administration painfully ill-prepared for diplomacy.

2018 will bring some of these difficulties into sharper relief. While the National Security Strategy was the first step towards steadying the administration’s foreign policy, filling out the government ranks of foreign and security policy professionals would go a long way.

Politics will likely obstruct focused diplomacy. The Republican Party is no longer a predictable, internationalist advocate for US foreign policy. The splintering of the Republican Party and leadership challenges for the Democratic Party make midterm elections in 2018 difficult to predict. One thing is sure: these elections will stir querulous political currents once more and keep Trump focused on his popularity at home.

Three foreign policy issues will confront the Trump administration in its second year. First, Washington’s trade policy will create dissonance between the United States and virtually all of its partners (particularly in Asia). While some US pushback on Chinese trade practices is welcome, a tit-for-tat trade war is not. The National Security Strategy takes a harder tack on US China policy — particularly on Beijing’s economic practices — which sets the stage for confrontation.

This alongside the ongoing difficulties in the North American Free Trade Agreement negotiations suggests that 2018 will bring trade to the forefront of US foreign policy. Many US allies are already girding themselves for a far stronger push by Washington to reopen existing agreements and to insist on new bilateral trade agreements on terms more favourable to the United States. As Trump’s trip to Asia in November revealed, the President wants to play hardball on trade — even with allies.

The second problem is North Korea — a problem that is likely to worsen in 2018. Sooner or later, some sort of showdown between the United States and North Korea is inevitable. Pyongyang continues its missile development, and the probability that one or both sides will use some sort of military force continues to be relatively high. With little evidence that Kim Jong-un is interested in abandoning his nuclear ambitions, regional fears over potential conflict on the Korean Peninsula will remain. Maintaining international support for sanctions on North Korea will require constant diplomatic effort.

A third challenge for the Trump administration is its relationship with Russia. The Mueller investigation into Trump’s alleged ties to the Kremlin has expanded to cover several of Trump’s campaign advisors, while congressional committee investigations will continue into 2018. The United States will need to put in place new measures to protect its elections from manipulation from Moscow by the midterm elections. Contrary to early expectations that the President would pursue friendlier relations with Russia, the National Security Strategy now clearly identifies Moscow as hostile to US security interests — a point that drew ire from Russian President Vladimir Putin.

Within the United States, the daily news cycle surrounding the administration’s difficulties is overwhelming. Lost in the drama is a serious debate over policy choices that will have long-term consequences not only for priorities at home, but also for Washington’s landscape abroad. Trump has withdrawn the United States from defining multilateral initiatives on trade and climate change. He has threatened partners into reassessing their economic ties with the United States. While advocating for a bulkier military presence abroad, he has yet to embrace the most important foreign policy tool of all: diplomacy.

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69th Secretary of State–Rex Tillerson

While much of the Trump administration’s first year difficulties can be attributed to the President’s inexperience, 2018 will bring far higher expectations of his leadership and ability to demonstrate that his vision for the United States brings results. The honeymoon phase of his presidency is now over. All eyes will be on Trump as he navigates a complex world increasingly challenging to US interests.

Sheila A Smith is Senior Fellow for Japan studies at the Council on Foreign Relations (CFR).

This article is part of an EAF special feature series on 2017 in review and the year ahead.

Is Trump’s America the ‘dispensable’ power in Asia-Pacifc?

January 14, 2018

Is Trump’s America the ‘dispensable’ power in Asia-Pacifc?

by David Camroux, Sciences Po (CERI)

Image result for Madeleine AlbrightFormer Secretary of State Madeleine Albright
Madeleine Albright, one of several scholar–statespersons the unique American spoils system used to produce as Secretary of State, characterised the United States as ‘the indispensable power’. In relation to East Asia today, that description seems no longer salient. In this vein, perhaps thirty years from now we will look back on US President Donald Trump’s first official visit to East Asia as the moment when the United States abandoned a superpower role in Asia and grudgingly accepted that hegemonic power in the region would be shared with China.

In his obsession with dismantling the legacy of his predecessor, Trump withdrew the United States from the Trans-Pacific Partnership (TPP) days after taking office. The TPP was the economic pillar of the US ‘pivot’ to Asia announced by former president Barack Obama in 2009. It marked a continuity in US Asia policy back to 1945 in that it constituted the economic element of a threefold approach. The other two pillars were hard security (reflected in Obama’s pledge to move 60 per cent of US naval assets to the Pacific) as well as public diplomacy or soft power in promoting international public goods (such as democracy and human rights). It also meant providing an intellectually formidable State Department with adequate resources.

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Trump’s trip to Asia in November 2017 demonstrated that his administration has largely abandoned, or at best severely weakened, two of the three pillars of this bipartisan foreign policy edifice. While in relation to North Korea there was a bellicose reaffirmation of the US commitment to playing sheriff, the multilateral economic and soft power dimensions were significantly downgraded. US proposals for bilateral trade deals were greeted with polite silence. Given the Trump administration’s drive to renegotiate the North American Free Trade Agreement and the US–Korea Free Trade Agreement as part of its ‘America first’ agenda, US credibility as a trustworthy trading partner has been sorely compromised.

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As for US soft power, Trump’s ‘bromance’ with his Philippine counterpart President Rodrigo Duterte — shown through the former’s previous praise for the latter’s war on drugs, which has resulted in some 12,000 extra-judicial killings — has demonstrated a downgrading of human rights concerns. Secretary of State Rex Tillerson’s call in Naypidaw for an independent inquiry into what the UN has categorised as the ethnic cleansing of the Rohingya seemed an effort of diplomatic tokenism. Only under pressure from the US Congress did he later invoke the term ethnic cleansing and the possibility of sanctions against the Myanmar military (Tatmadaw).

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By contrast, China potentially has the economic clout and political influence to impose a solution on the top ranks of the Tatmadaw. Tillerson’s Chinese counterpart Foreign Minister Wang Yi has proposed a three-phase plan for resolving the Rohingya crisis — a proposal that received support from both Bangladesh’s and Myanmar’s governments, with Aung San Suu Kyi visiting Beijing on 30 November.

In Manila there was the striking juxtaposition of the weakened US President vehemently defending a curious mix of bilateralism and isolationism against recently emboldened Chinese President Xi Jinping, who has been positioning his country as the champion of multilateralism and defender of the existing international order.

Rhetorically, for Trump, the term Asia Pacific has been replaced by ‘Indo-Pacific’: a revival of Japanese Prime Minister Shinzo Abe’s idea of a quadrilateral security arrangement involving Australia, India, Japan and the United States. If the United States cannot be a leader in a multilateralised East Asia, then perhaps it can consolidate three existing bilateral relations to be the first amongst equals.

But if we examine the practice of Trump’s administration, does the United States have the capacity to fulfil even this limited goal? Even further, does it have the desire to?

The breakdown of its Asia foreign policy status quo involves a combination of wilful negligence and discreet sabotage. Abandoning the TPP fell into the first category, while the hollowing out of the US State Department is a combination of both. Ten months after Trump’s inauguration, many senior positions in the State Department still have not been filled. Some one hundred senior diplomats have left and the threat of a one-third budget cut remains. The Trump administration’s gratuitous assault on multilateral institutions and agreements such as the WTO, UNESCO and the Paris Climate Change Agreement is being conducted in the same vein.

Yet while the United States has been seeking to weaken the international institutions it helped establish, China has been creating new international institutions to further its aims. An October 2014 China Monitor suggests some fourteen parallel and alternative multilateral structures with the potential to supplant existing ones. The most visible in Asia is the Asian Infrastructure Investment Bank. At what point a parallel institution supplants an existing one — if that is the objective of the Chinese leadership — is debatable. Still, in terms of articulating a long-term vision, China’s Belt and Road dwarfs anything that Trump seems capable of offering.

The question is whether this new emerging order will involve ‘multilateralism with Chinese characteristics’. Much will depend on whether other powers, notably the European Union, can compensate for the US vacuum to preserve and promote a liberal multipolar international environment.

David Camroux is Senior Research Associate at the Centre for International Studies (CERI), Sciences Po, Paris and Professorial Fellow at the Vietnam National University (USSH), Hanoi.

This article is part of an EAF special feature series on 2017 in review and the year ahead.

Regional Comprehensive Economic Partnership (RCEP) is the way forward for ASEAN

November 2, 2017

Regional Comprehensive Economic Partnership (RCEP) is the way forward for ASEAN

by M. Chatib Basri, University of Indonesia

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The success story of the East Asian economy was about the connection between trade and industrialisation — look at the cases of Japan, South Korea, China, Taiwan and Singapore. Trade-oriented industrialisation drove regional economic integration in through trade and investment — and integration into the world economy that was made possible by conducive global economic growth and a relatively open global economy.


Unfortunately, the party is now over. Many economists are beginning to talk of a ‘new normal’ global economy with slower growth and trade. Brexit, the ascendency of US President Donald Trump and anti-immigration sentiment all point to a growing resistance to globalisation. At the March 2017 G20 meeting in Germany, even finance ministers and central bank governors backed away from agreement on support for free trade and investment.

It’s premature to conclude that the world has fully embraced protectionism, but the conditions for trade liberalisation and negotiating trade agreements are tougher than they were. Economic recovery in the United States and some parts of Europe remains fragile, and China’s growth though robust is also on the wane. Against this ‘new normal’ backdrop, what can ASEAN countries do to counter this trend and mitigate its impact? What role can regional cooperation play in addressing these emerging challenges in the global trade and investment environment?

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Slowing economic growth will impact on job creation, and ASEAN nations cannot afford slow economic growth — more jobs are essential to win the fight on reducing poverty.

ASEAN and East Asia must continue to encourage economic growth to improve the socio-economic welfare of their citizens. Even though global growth  is sluggish, East Asian economies still have relatively high growth. The potential is there. East Asia must strive to achieve it growth potential.

Fiscal expansion is one possible solution for those countries that have the fiscal space — though that’s a luxury afforded to few countries in ASEAN. Room for monetary expansion is also limited due to the growing possibility of the normalisation of US monetary policy.

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Forcing the pace on continued structural reform is where progress is vital. But structural reform is much easier said than done. Further unilateral liberalisation is not easy when the rest of the world is consumed by creeping protectionism, and the progress of a multilateral agenda is still in limbo as the WTO’s Doha Round seemingly goes nowhere.

A more feasible way forward is a combination of structural reform and the revitalisation of regional cooperation.

Pursuing openness through regional economic integration will not be easy. The trend towards deglobalisation demonstrates that the original model of globalisation — rapidly reducing the barriers to trade of goods and services trade— does not have strong political backing. It’s clear that economic reform and trade liberalisation need now to be accompanied by policies that ensure that ‘losers’ in realising the overall gains from trade are effectively compensated. Where distribution of the gains from trade has not been attended to, globalisation’s positive impact has found less support among the people and political will for it has waned. A consequence is the pockets of deep political resistance to globalisation.

Restoring trust in globalisation is now a primary goal. This can be done by highlighting globalisation’s success stories and its direct and positive impact on people’s lives. The success of reform does not hang on the merits of the reform’s agenda, but rather on political support — an intrinsic dilemma of reform is that the cost is more immediate and concentrated and the benefit is more diffuse and long term. This makes it necessary to get ‘quick wins’ or success stories to ensure political support.

These circumstances underline the need for multi-stage regional cooperation. This can start slowly and then tackle more complex issues. For example, instead of negotiating over how to lower trade barriers, negotiations can start on issues related to connectivity and capacity building. These objectives are acceptable politically by nearly all member countries and can be economically beneficial. Revitalising the ASEAN infrastructure fund is another example of a ‘low hanging fruit’ in regional cooperation.

If this kind of cooperation can be carried out, people will feel its real impact of regional cooperation and ASEAN states can move forward with a more complex agenda for economic integration.

The Regional Comprehensive Economic Partnership (RCEP) fits the bill and can now be brought into play. The Trans-Pacific Partnership (TPP) is practically dead in the water since the United States withdrew. RCEP is the only way forward. RCEP provides an ongoing framework through which to promote open regionalism and an open international economy. RCEP is important for ASEAN as an initiative that was put forward when Indonesia was the chair of ASEAN in 2011 — not a Chinese initiative as some wrongly believe.

As the global economy and the support for globalisation both languish, ASEAN nations need to act immediately to preserve the economic order that gave East Asia such prodigious development. RCEP offers a practical way forward in global trade diplomacy — and ASEAN would be remiss not to pursue it fully at a time when it’s important to our global economic future.

Chatib Basri is a Senior Lecturer at the Department of Economics, University of Indonesia and formerly Indonesia’s minister of finance.