A More Disciplined Monetary Approach And Underwriting WTO Change Is Needed.

The attached interview is with Stephen S. Roach, Yale Professor and former Morgan Stanley Asian chief economist.

Since global supply chains are China-driven, quarantines and travel limitations to contain COVID-19 have delivered an all-out supply shock. With China representing 37% of total world GDP, the demand side ramifications of the virus are additionally substantial. Traditional monetary/fiscal-stimulus measures can't mitigate the adverse economic impacts. The global economy's long-standing trade "cushion" – that is, rapid trade growth – is exhausted. Reestablishing that cushion through agreements might be ideal, but they commonly take a long time to arrange.

The source of the slowdown in trade is increased policy uncertainty in an era of subpar global demand. The headwinds created by progressively nationalistic, inward-looking politics in many countries are at the heart of the problem. An interconnected world needs a vigorous multilateral strategy design. Given America's chronic domestic saving shortfall – the current US bilateral trade approach will not help the situation. Addressing our saving problem through a more disciplined monetary approach and underwriting WTO change would be an undeniably more effective strategy.

This week, Project Syndicate catches up with Stephen Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia.

Project Syndicate: Much has been written about how emerging economies can protect themselves from risks generated by the advanced economies, and how the world can protect itself from the risks of a Chinese growth slowdown or debt crisis. But the new coronavirus, COVID-19, represents yet another economic risk, owing to the disruption of global value chains. Does this affect your prediction that even a protracted US-China rupture would not split the global economy? Are there steps the rest of the world can take to minimize the economic risks arising from COVID-19?

Stephen Roach: Economists (including me) have an unfortunate knack for compartmentalizing. We treat non-economic developments like COVID-19 as so-called exogenous shocks, rather than build them into our forecasting models as endogenous features.

In my work on China, I have long stressed the deficiencies of its social safety net – not just pensions, but also health care – as a key reason why families save so much: they are motivated more by fear of an uncertain future than by purely economically-driven life-cycle considerations. While I have argued that Chinese households’ precautionary saving remains a key impediment to more robust consumption growth, I am guilty of not anticipating how an underfunded public-health system left China highly vulnerable to the outbreak of another devastating virus, only 17 years after it was hit by severe acute respiratory syndrome (SARS).

As I discuss in my latest PS commentary, because global supply chains are China-centric, draconian quarantines and travel restrictions intended to contain COVID-19 have produced a full-blown supply shock, at a time when the global economy is already vulnerable. And with China accounting for 37% of cumulative world GDP growth since 2008, and representing the largest external market for most Asian economies, the demand side implications of COVID-19 are also significant.

While traditional monetary- and fiscal-stimulus measures cannot mitigate the adverse economic effects of quarantines, travel restrictions, and other virus containment measures, they offer some comfort to battered financial markets looking for what one hopes is the inevitable post-virus rebound.

PS: More broadly, you’ve emphasized that the global economy’s long-standing trade “cushion” – that is, rapid trade growth – is significantly depleted. Restoring that cushion through, say, free-trade agreements might be ideal, but trade pacts typically take years to negotiate. Are there other, more immediately viable ways to insulate the global economy against shocks?

SR: There has been a big debate over the sources of the post-crisis slowdown in global trade. Some say that it is traceable to a pronounced shortfall in business capital spending, while others point to the recent surge of protectionism. Yet at the root of both explanations is increased policy uncertainty in an era of subpar growth in global demand. While multilateral trade liberalization would be certainly be a good thing, it would not offset the headwinds produced by increasingly nationalistic, inward-looking politics in many countries.

PS: “Even if a new [US] president were to remain tough on China,” you wrote last summer, “a coherent and well-articulated US strategy would be far more effective in framing the debate and offering hope for constructive resolution of grievances.” What are the most critical elements of such a strategy?

SR: Playing by the rules, rather than ruling by tweet, would be an important first step. Yes, the rules-based trading system, underpinned by the World Trade Organization, needs reform. But championing such reform is very different from enfeebling the WTO’s dispute settlement system, as the United States has done by blocking new appointments to the Appellate Body of judges that arbitrates disagreements.

An interconnected world needs a robust multilateral policy architecture. Given America’s chronic domestic saving shortfall – which is going from bad to worse, owing to ever-expanding federal budget deficits – and its trade deficits with 102 countries, the bilateral approach favored by President Donald Trump’s administration is a recipe for failure. Addressing our saving problem through more disciplined fiscal policy and endorsing WTO reform would be a far more effective strategy.

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