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Prospect of Trump tariffs unnerves Asian investors

Prospect of Trump tariffs unnerves Asian investors

Trade barriers against any one country would be felt across interconnected region

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JANUARY 19, 2017 by: Jennifer Hughes in Hong Kong Look out of the window as you fly into Singapore and hundreds of ships will be visible below. Situated near the Malacca Straits, this comes as no surprise and vividly illustrates the importance of shipping — and by extension trade — to Asia. The region connects with four of the world’s five busiest shipping routes and, led by China, is home to nine of the top 10 container ports. Singapore’s crowded moorings include long-term “parked” ships awaiting an upturn in global trade as well as those in transit. Now, with the inauguration of Donald Trump as US president looming on Friday, markets have begun to analyse the potential impact of his proposals for eye-popping tariffs as well as measures put forward by other Republicans. Asia’s reliance on trade means the region is highly vulnerable to any change in the world order.

Leader of Globalization. Does Xi Really Mean It?

Chinese President Xi Jin Ping spoke to defend globalization and advocated for free trade at the World Economic Forum in Davos.  While the speech has been hailed by many, commentators around the world also question whether Xi was sincere about it. See the following:

Forbes: Xi Jinping’s Davos Speech Defends Globalization But Does China Really Mean It?

About this time of year, most years, journalists looking for inspiration can always turn their eyes towards the rarified atmosphere of a certain Swiss ski resort, find out what the assembled notaries are discussing, and produce a few thousand words of inconsequential burbling about technology, economics and social transformation. This year, however, the entire world is a target rich environment–excuse the pun–for the doleful hack in need of inspiration.

China’s President Xi Jinping delivers a speech on the opening day of the World Economic Forum, on January 17, 2017 in Davos.The global elite begin a week of earnest debate and Alpine partying in the Swiss ski resort of Davos on Tuesday, in a week bookended by two presidential speeches of historic import. / AFP / FABRICE COFFRINI (Photo credit should read FABRICE COFFRINI/AFP/Getty Images)

Fortunately, the organizers of the World Economic Forum meeting at Davos had the inspired idea of inviting Xi, President of the People’s Republic of China, who arrived to a red carpet welcome on Monday. As brand management strategies go, this is “Grade A,” ensuring the name Davos appeared on today’s front pages around the world, rather than in comment page reflection pieces entitled “Whatever happened to … ?”

Instead, Davos showed the world the urbane figure of Xi, quoting Dickens’ A Tale of Two Cities. “It was the best of times, it was the worst of times,” he said to a flutter of applause, laying an unambiguous claim on the sort of cosmopolitan sensibility that is de rigeur in these climesUnfortunately, Xi also suggested Dickens was portraying the industrial revolution, rather the much bloodier French revolution that informs the story and constructs a metaphor for a progressive, liberal country, rising to global prominence, while its old enemy descends into bloody strife.

There is no escaping, however, that Xi delivering the opening plenary speech at Davos is also a powerful metaphor, the only question is, of what? Many headlines will refer to Xi’s defence of globalisation in the face of endless challenges. Other’s will complement the emerging helmsman for his pragmatism while sneering at Trump’s bombast.

But behind it all is public diplomacy; it is China sounding reasonable, conciliatory, patient, ready to assume the mantle of leadership that so many are so eager to thrust upon it. And the Davos crowd seemed to love it. Xi’s joke about “Schwab-onomics”– after Klaus Schwab, the founder and guiding spirit of Davos–was wooden, but everyone laughed politely anyway. There were no interruptions. No activists bursting in to scream obscenities, no impertinent questions about his private wealth, no mention of the routine censorship and suppression of dissent in China. Just Xi, holding court to a roomful of forlorn globalization disciples, searching for new hope.

The speech itself contained little of substance, many selective embellishments and quite a few glaring omissions, but was what everyone has come to expect of a Chinese leader on the world stage. The real problems, he said, were threefold: Not enough ‘driving force’ for reform and development. Inadequate global governance, by which he really meant that China did not have enough say over the rules and institutions. And lastly, unequal global development.

What is required, apparently, is innovation, and a new economic model to encourage it. One might conclude from these words that capitalism would be worth a try, but no, each country must develop “according to their own conditions,” he said. Absent from the speech was any mention of global imbalances, or closed capital markets and a history of currency manipulation. These were, however, stern demands that countries “honour promises and obey rules.”

Two developments accompanied the speech suggest a degree of predictable choreography for a set-piece performance such as this. The State Council issued new policy guidelines to help foreign investors in China, which only served to remind people that these same promises have been made many times before, indeed they were among the many conditions of China’s WTO accession agreement in 2001, but clearly sticking to those promises and obeying those rules is not in accordance with China’s conditions.

Then it transpired that “state investors bought shares to steady” a declining Chinese stock market, which reminds everyone that the Chinese state maintains its ‘driving force’ for a reason, which is to make markets do what they are told.

The difficulty of interpreting a speech like this is not really in the content of the speech itself–Chinese speeches are always about reading between the lines in any case–so much as understanding reactions to it. China watchers are used to sifting through the dense web of self-justification and misdirection that comprise a major address like this, but such a speech is not really a positive contribution to global dialogue so much as another rehearsal of China’s global outlook.

The setting, however, is of crucial importance as it creates the impression that China is keen to support globalization. An impression Klaus Schwab and the Davos elite fell over themselves to endorse. And what this rapturous reception signifies is that globalization, increasingly abandoned in the West, thinks it has found a new champion in the East.

Towards the end of his address, Xi uttered one of those amusingly mistranslated aphorisms when he said “no pie falls from the sky” when he likely meant “no such thing as a free lunch,” a saying which the applauding dignitaries appeared keen to refute.

China’s Xi Jinping Seizes Role as Leader on Globalization

‘No one will emerge as a winner in a trade war,’ Chinese president says

The Wall Street Journal,

Chinese President Xi Jinping urged the world to “say no to protectionism” with a full-throated defense of free trade at the opening of the World Economic Forum in Davos, Switzerland. Photo: Gian Ehrenzeller/European Pressphoto Agency

Chinese President Xi Jinping issued a full-throated defense of international trade and economic integration before a packed hall here, as doubts about the merits of globalization mount in the U.S. and elsewhere in the West.

“No one will emerge as a winner in a trade war,” Mr. Xi, the leader of the world’s second-biggest economy, said in an hourlong speech on Tuesday to members of the world elite gathered for the annual World Economic Forum. “Pursuing protectionism is just like locking one’s self in a dark room. Wind and rain may be kept outside, but so are light and air.”

The Chinese leader’s message comes as the U.S. prepares to inaugurate President-elect Donald Trump, who has voiced skepticism about the benefits of free trade to the U.S.

Mr. Xi sought to portray Beijing as a benevolent power intent on upholding an international order that has boosted common prosperity. He exhorted world leaders to “join hands and rise to the challenge.”

The speech was portrayed by some who heard it as a response to politicians in the U.S. and Europe who are turning their focus inward.

“There is a vacuum in global leadership. Xi sees it and he seizes it,” said Carl Bildt, a former prime minister of Sweden, who was in the audience. “If the U.S. does take a more mercantilist route, overall the Asians and Europeans will have to combine to preserve global free trade.”

China has been one of the biggest beneficiaries of globalization, which opened the way for the country, with its vast and relatively low-wage workforce, to become the world’s factory floor. Inexpensive goods manufactured in China have flooded the planet.

That shift helped lift hundreds of millions of Chinese from poverty. But it was also a factor that contributed in costing millions of workers in the West their jobs, fueling mounting suspicion of transnational economic integration and the current antiestablishment backlash in politics in much of the developed world.

“Some people blame economic globalization for the chaos in our world,” Mr. Xi said. He dismissed the idea—and acknowledged that globalization had resulted in growing income inequality within many countries.

“It’s important that China is saying that there are important benefits of globalization and acknowledges that there are many problems that have to be worked through,” said David Lipton, first deputy managing director of the International Monetary Fund.

Xi Jinping is the first Chinese president to attend the World Economic Forum in Davos Switzerland; he has presented China as a benevolent global power amid differences with the incoming Trump administration. Photo: Getty

In many ways, Mr. Xi—and his government—are deeply ambivalent about globalization. Mr. Xi is an unabashed nationalist, who resents the West’s lecturing on human rights and democracy. He has sought to bulk up state-run companies and kept China’s internet isolated behind its Great Firewall.

Mr. Xi stressed that no power should attempt to dictate to other countries a specific path. Development, he said, is “of the people, by the people, and for the people,” borrowing a phrase from U.S. President Abraham Lincoln’s Gettysburg Address.

Some in the audience noted irony in the appeal from the leader of a country that has undermined competition.

Foreign companies and governments complain that China has moved to restrict foreign companies’ access to its markets, while buying up technology and assets from firms abroad. The U.S. and Europe also accuse China of selling goods from steel to solar panels at improperly low prices.

“Here, we have the global elite embracing Xi as the anti-Trump,” said Lawrence Freedman, emeritus professor of war studies at King’s College, London.

Donald Trump’s suggestion that he would use Taiwan as a negotiating chip with China to extract concessions over trade hit a raw nerve in Beijing. Photo: EPA/Reuters

Mr. Trump has pledged to defend American firms and workers against foreign competition and impose tariffs on imports from China and Mexico, among other countries. Mr. Trump also accused China of manipulating its currency to boost exports.

“China has no intention to boost its trade competitiveness by devaluing the renminbi, still less will it launch a currency war,” Mr. Xi said.

China’s yuan weakened almost 7% against the dollar last year, nearly double the drop in the year earlier. In recent weeks, China’s central bank has stepped up its effort to prop up the yuan as Beijing pledges to keep the currency largely stable.

In his speech, Mr. Xi built a case that China should have a greater formal role in guiding the world economy. He gave his endorsement to the 2015 Paris agreement on carbon emissions, calling on countries to “stick to it instead of walking away from it.”

Mr. Trump has called climate change a hoax, fueling speculation that he might pull the U.S. out of the accord.

Some in the audience questioned the readiness of China to adopt the leadership role that Mr. Xi was viewed as mapping out.

“In these times of a lack of leadership, particularly in Europe, it was quite impressive,” said Werner Hoyer, president of the European Investment Bank, which is owned by the 28 member states of the European Union.

But when asked if he thought that China’s institutions were ready to take on the leadership of the world economy, Mr. Hoyer said: “Not yet.”

Mr. Xi’s legitimacy at home depends in large measure on his ability to manage a continued slowdown in China’s own economy while continuing to assert Chinese territorial claims despite U.S. opposition.

Mr. Xi said China’s economy has entered a “new normal” of slower but more sustainable growth. Household consumption and services have become new growth drivers for the economy, Mr. Xi said.

He said China’s economy grew at 6.7% last year, within the range of between 6.5% and 7% targeted for 2016.

Still, that growth came through easy credit and other stimulus that revved up industries and the property market, contributing to overcapacity and soaring house prices. Mr. Xi acknowledged those headwinds. China’s leadership has made fending off asset bubbles a key economic task for 2017.

Write to Stephen Fidler at, Te-Ping Chen at and Lingling Wei at


At Davos, a clarion call by world leaders, including Xi Jinping and Joe Biden, to defend global order

Biden pulls no punches as he warns against protectionism and Russia’s shenanigans

DAVOS (SWITZERLAND) – With the clock ticking down on his last 48 hours in office, US Vice-President Joe Biden delivered a rallying call to government and business leaders here in Davos to keep up their fight to defend the liberal global economic and political order that has come under pressure from populist challengers in recent months.

Leaders in Western countries, led by the United States, had to defend the liberal global order that their forefathers had shown “foresight, audacity and big-heartedness” in building. Institutions and initiatives such as the United Nations, Nato, the European Union, the Marshall Plan and Bretton Woods had helped secure the decades of peace and prosperity that the world has enjoyed, he told his audience at the World Economic Forum (WEF).

Urging leaders not to lose sight of the years of effort it took to build these institutions and foster the community of values that underpinned them, he added that leaders in the West “could not wait for others to write the future they want to see”.

They should reject the impulse to “hunker down, shut the gates, build walls, exit at this moment”, in the face of challenges thrown up by globalisation, from growing income inequalities to a deepening sense of insecurity among voters that the system would deliver on the promise of better lives for their children, he said.

Mr Biden and Mr Xi meeting on the sidelines of the WEF in Davos. Mr Biden chose to deliver his last official speech in Davos, while Mr Xi was the first president from China to address the forum. Both men gave a robust defence of an open, liberal worl
Mr Biden and Mr Xi meeting on the sidelines of the WEF in Davos. Mr Biden chose to deliver his last official speech in Davos, while Mr Xi was the first president from China to address the forum. Both men gave a robust defence of an open, liberal world order against the backdrop of a possible hunkering down by the US under a Trump administration. PHOTO: XINHUA

Noting the unease felt around the world following recent events, he addressed the Republican elephant that has been hanging about the WEF’s cavernous Congress Hall for the past two days. Although he insisted his remarks were not directed at the incoming Donald Trump administration – mention of which prompted a loud boo from someone in the crowd – he set out in plain terms what he thought the world wanted to see from an American leadership.

As is his style, he did not mince his words. He pointedly called out Russian President Vladimir Putin, who, he said, “has a different vision of the future”. He charged that Mr Putin was behind cyber attacks and misinformation to influence electoral outcomes in Western democracies, including the recent US elections. He said the Russian leader also aimed to undermine Western alliances like Nato, seeking instead to build a world divided into spheres of influence where regional players, like Russia, would hold sway. The US, for its part, had stood for an international order where countries were free to decide their own futures and associate with others as they saw fit. “That was our position, is our position, and should be our position,” Mr Biden asserted, noting that he had chosen to deliver his last speech in Davos, in much the same vein as he had set out the Obama administration’s foreign policy agenda in Europe, in a speech in Munich, soon after taking office eight years ago.


Under President Putin, Russia is working with every tool available to them to whittle away at the edges of the European project, test the fault lines of Western nations and return to a politics defined by spheres of influence… With many countries in Europe slated to hold elections this year, we should expect further attempts by Russia to meddle in the democratic process. It will occur again, I promise you. And again the purpose is clear: to collapse the liberal international order.



There is no point in blaming economic globalisation for the world’s problems because that is simply not the case… And that will not help to solve the problems… The history of mankind has shown us that problems are not to be feared. What should concern us is the refusal to face up to the problems.


These were welcome words for the crowd gathered in this Swiss Alpine resort for the annual WEF meeting, who gave him a standing ovation. There was a note of wistfulness about the passing of the baton to a new team in the US whose commitment to the liberal order seems in doubt, following recent remarks by incoming president Trump, who has called Nato “obsolete” and the EU a “vehicle for Germany”. Just as disconcertingly for observers in Asia, he has said he was ready to bargain with Beijing over the US’ one-China policy, and also seemed headed for a confrontation with China over trade.

Against this backdrop, it was little wonder that, a day earlier, delegates here had clung to the words of Chinese President Xi Jinping, who hit all the right notes in voicing his support for the liberal economic order.

In a speech on Tuesday, Mr Xi rejected protectionism, urged against a “trade war in which there are no winners”, and pledged that China would keep its economy open to the world.

It was pointless blaming globalisation for economic challenges, he said, as this was “not the case, and would not solve the problems”. He also likened protectionism to shutting oneself in a dark room, which might keep out the wind and the rain but also block out the sunshine.

He went on to outline China’s proposals for collaborative projects, from its much vaunted One-Belt-One-Road initiative to foster trade links between Asia and the West, to long overdue structural reforms to “Western- centred” international institutions.

Mr Xi made history by being the first president of China to address the WEF, which rolled out the red carpet for him. He was given top billing for a keynote address on Day One of the week-long conference. He later also witnessed the signing of a “strategic partnership” between China’s National Development and Reform Commission and the WEF to deepen their collaboration over the next 10 years.

Responding to Mr Xi, WEF founder and executive chairman Klaus Schwab hailed his address as a “very important speech at a historic time”. He welcomed China’s efforts to support, as well as reform, the present institutional system and be a “driving force in the world for globalisation”.

Mr Schwab’s sentiments seemed to be shared by delegates, many of whom appeared delighted at the Chinese leader’s robust defence of globalisation at a time when some of its usual champions in Washington and the West seem to have lost faith in the project.

There have been, after all, many calls from these quarters for China to pitch in to uphold the rules-based system that has enabled it to make such rapid progress through international trade and economic co-operation.

The irony, however, of the liberal capitalist order being given a much-needed booster shot by the leader of a nominally Communist state, once itself deeply suspicious about signing up to it, was not lost on delegates.

In discussions afterwards, there were some sceptical voices raised about what a “globalisation with Chinese characteristics” might entail for the world.

Which explains why Mr Biden’s farewell speech was such a hit with the crowd yesterday.

With a new US leader waiting to be sworn in tomorrow, just as proceedings here will be winding down, many remain deeply unsure if the clock was not also winding down on the globalisation project they have long supported, and benefited from.

A version of this article appeared in the print edition of The Straits Times on January 19, 2017, with the headline ‘A clarion call to defend the liberal global order’.


China is looking to position itself as the guarantor of global trade after Donald Trump’s election.

What a difference a decade can make. China went from being lambasted for being an irresponsible stakeholder in the mid-2000s, to now being seen as the linchpin of global economic stability. This reality set in for many on Tuesday as China’s President Xi Jinping took the stage to deliver a staunch defense of economic globalization, and international cooperation on issues that threaten global prosperity and growth.

Contrast these remarks to the outbursts from President-elect of the United States Donald Trump about the unfair advantages built into the global economy’s rules of the game—rules that have paved the way for the U.S.’s rise to the top—and we are all left scratching our heads.

If Xi’s opening address to Davos’s exclusive club of the economic and political elite is any indication of what is to come in 2017, China could be the most powerful voice heralding the social and economic benefits of globalization, inviting countries to join free trade pacts that it hosts and organizes, and investing into developing countries to gain market access.

That’s right; China, a developing country with swathes of rudimentary territory and hundreds of millions of people still living in poverty, is championing economic globalization. Clearly, we are living in an upside-down world.

In his Davos keynote, President Xi rejected the notion that “outside forces” or economic globalization were to blame for the world’s socioeconomic ills. Likely responding to Trump and the European populist rhetoric that has monopolized headlines for the past several months, Xi took aim at ongoing conflict, geopolitical instability, the rise of terrorism and refugee crises as the root causes of “what has gone wrong with our world.”

Unsaid was a point Chinese officials have made before; that it was sustained American intervention in the Middle East’s political history, most notably in Iraq in 2003, that brought on this regional instability and spillover to chaos we see today.

Xi also hinted at previous U.S. follies of “chasing reckless profits” and poor financial market regulations that ushered in the onset of the 2008 global financial crisis. Xi praised G20 initiatives that improve global economic governance of financial flows and banking regulations, but he and other world leaders ought to be rightly worried about Trump’s likelihood of tearing down the Dodd-Frank financial regulations that had put stronger oversight on American banks and investment firms.

It was New York that was the epicenter of the international financial crisis, but its fallout was far more felt in Athens, Madrid and Dublin.

From finance to trade, it appears Trump’s America will no longer play the role of enforcing the liberal rules and norms the country once coveted and benefited from. Instead, it is Xi’s China that is promising to expand the One Belt One Road (OBOR) initiative to link Asia to Europe and Africa using land, air, and sea. The OBOR is reminiscent of the U.S.’s own Marshall Plan for Europe : Xi heralded it as an ambitious foreign aid program that will bring investment, economic growth, and open trade routes for developing markets. Xi declared that China is open to trade and welcomes the world to take advantage of its market, the largest developing economy in the world, just at a time when the US is expected to raise protectionist barriers and breakdown free trade agreements.

Where the United States once claimed itself to be the center of research and development, technological innovation and intellectual property, Xi noted how China is encouraging domestic consumption and savings, growing its service sector to diversify from manufacturing, and is investing in and promoting green technologies.

Xi rejected the idea that economic globalization brought all ills, pointing to advances made in productivity, technology, and scientific advancements. He did not deny that there will be inequality, since the “ world cake ” cannot be made bigger, but that countries need to cushion against the negative impact. But, Xi reminded us that the world may be on the cusp of new technological changes from artificial intelligence to 3D printing and green technologies. Unlike Trump’s doom and gloom rhetoric about the world, Xi shared some much needed optimism and hope that was well-received by the forum in the Swiss ski resort town.

To ward against another 1930s-like depression of beggar-thy-neighbor policies, U.S. presidents have used monetary policy to shore up global trade. To prevent an exodus of capital from already hurting emerging market economies to the United States, Federal Reserve Chair Janet Yellen has been cautious about increasing interest rates; a monetary policy decision that Trump has railed against. Where the U.S. dollar had been the currency used to shore up world trade, the greenback clearly does not have the domestic political backing it once had. Yet it was Xi who promised not to devalue the Chinese renminbi so as to not cause a currency war.

Trump’s America seems more like the irresponsible and bystander state and China appears more like the guarantor and bulwark of global economic stability through a shared vision of increased economic cooperation and commitment to inclusive growth. Perhaps next year the annual World Economic Forum ought to be held at China’s Yabuli Ski Resort instead, confirming that the world is truly upside-down.

Bessma Momani is professor at the Balsillie School of International Affairs and the University of Waterloo and senior fellow at the Centre for International Governance and Innovation and the Brookings Institution.

President Xi’s speech to Davos in full

Opening Plenary with Xi Jinping, President of the People's Republic of China in Davos, January 17, 2017. Copyright by World Economic Forum / Valeriano Di Domenico

I’m delighted to come to beautiful Davos. Though just a small town in the Alps, Davos is an important window for taking the pulse of the global economy. People from around the world come here to exchange ideas and insights, which broaden their vision. This makes the WEF annual meeting a cost-effective brainstorming event, which I would call “Schwab economics”.

“It was the best of times, it was the worst of times.” These are the words used by the English writer Charles Dickens to describe the world after the Industrial Revolution. Today, we also live in a world of contradictions. On the one hand, with growing material wealth and advances in science and technology, human civilization has developed as never before. On the other hand, frequent regional conflicts, global challenges like terrorism and refugees, as well as poverty, unemployment and widening income gap have all added to the uncertainties of the world.

Many people feel bewildered and wonder: What has gone wrong with the world?

To answer this question, one must first track the source of the problem. Some blame economic globalization for the chaos in the world. Economic globalization was once viewed as the treasure cave found by Ali Baba in The Arabian Nights, but it has now become the Pandora’s box in the eyes of many. The international community finds itself in a heated debate on economic globalization.

Today, I wish to address the global economy in the context of economic globalization.

The point I want to make is that many of the problems troubling the world are not caused by economic globalization. For instance, the refugee waves from the Middle East and North Africa in recent years have become a global concern. Several million people have been displaced, and some small children lost their lives while crossing the rough sea. This is indeed heartbreaking. It is war, conflict and regional turbulence that have created this problem, and its solution lies in making peace, promoting reconciliation and restoring stability. The international financial crisis is another example. It is not an inevitable outcome of economic globalization; rather, it is the consequence of excessive chase of profit by financial capital and grave failure of financial regulation. Just blaming economic globalization for the world’s problems is inconsistent with reality, and it will not help solve the problems.

From the historical perspective, economic globalization resulted from growing social productivity, and is a natural outcome of scientific and technological progress, not something created by any individuals or any countries. Economic globalization has powered global growth and facilitated movement of goods and capital, advances in science, technology and civilization, and interactions among peoples.

But we should also recognize that economic globalization is a double-edged sword. When the global economy is under downward pressure, it is hard to make the cake of global economy bigger. It may even shrink, which will strain the relations between growth and distribution, between capital and labor, and between efficiency and equity. Both developed and developing countries have felt the punch. Voices against globalization have laid bare pitfalls in the process of economic globalization that we need to take seriously.

As a line in an old Chinese poem goes, “Honey melons hang on bitter vines; sweet dates grow on thistles and thorns.” In a philosophical sense, nothing is perfect in the world. One would fail to see the full picture if he claims something is perfect because of its merits, or if he views something as useless just because of its defects. It is true that economic globalization has created new problems, but this is no justification to write economic globalization off completely. Rather, we should adapt to and guide economic globalization, cushion its negative impact, and deliver its benefits to all countries and all nations.

There was a time when China also had doubts about economic globalization, and was not sure whether it should join the World Trade Organization. But we came to the conclusion that integration into the global economy is a historical trend. To grow its economy, China must have the courage to swim in the vast ocean of the global market. If one is always afraid of bracing the storm and exploring the new world, he will sooner or later get drowned in the ocean. Therefore, China took a brave step to embrace the global market. We have had our fair share of choking in the water and encountered whirlpools and choppy waves, but we have learned how to swim in this process. It has proved to be a right strategic choice.

Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries and people between economies, and channel the waters in the ocean back into isolated lakes and creeks is simply not possible. Indeed, it runs counter to the historical trend.

Opening Plenary with Xi Jinping, President of the People's Republic of China in Davos, January 17, 2017. Copyright by World Economic Forum / Valeriano Di Domenico

Image: Valeriano Di Domenico

The history of mankind tells us that problems are not to be feared. What should concern us is refusing to face up to problems and not knowing what to do about them. In the face of both opportunities and challenges of economic globalization, the right thing to do is to seize every opportunity, jointly meet challenges and chart the right course for economic globalization.

At the APEC Economic Leaders’ Meeting in late 2016, I spoke about the necessity to make the process of economic globalization more invigorated, more inclusive and more sustainable. We should act pro-actively and manage economic globalization as appropriate so as to release its positive impact and rebalance the process of economic globalization. We should follow the general trend, proceed from our respective national conditions and embark on the right pathway of integrating into economic globalization with the right pace. We should strike a balance between efficiency and equity to ensure that different countries, different social strata and different groups of people all share in the benefits of economic globalization. The people of all countries expect nothing less from us, and this is our unshirkable responsibility as leaders of our times.

Ladies and Gentlemen,
Dear Friends,

At present, the most pressing task before us is to steer the global economy out of difficulty. The global economy has remained sluggish for quite some time. The gap between the poor and the rich and between the South and the North is widening. The root cause is that the three critical issues in the economic sphere have not been effectively addressed.

First, lack of robust driving forces for global growth makes it difficult to sustain the steady growth of the global economy. The growth of the global economy is now at its slowest pace in seven years. Growth of global trade has been slower than global GDP growth. Short-term policy stimuli are ineffective. Fundamental structural reform is just unfolding. The global economy is now in a period of moving toward new growth drivers, and the role of traditional engines to drive growth has weakened. Despite the emergence of new technologies such as artificial intelligence and 3-D printing, new sources of growth are yet to emerge. A new path for the global economy remains elusive.

Second, inadequate global economic governance makes it difficult to adapt to new developments in the global economy. Madame Christine Lagarde recently told me that emerging markets and developing countries already contribute to 80 percent of the growth of the global economy. The global economic landscape has changed profoundly in the past few decades. However, the global governance system has not embraced those new changes and is therefore inadequate in terms of representation and inclusiveness. The global industrial landscape is changing and new industrial chains, value chains and supply chains are taking shape. However, trade and investment rules have not kept pace with these developments, resulting in acute problems such as closed mechanisms and fragmentation of rules. The global financial market needs to be more resilient against risks, but the global financial governance mechanism fails to meet the new requirement and is thus unable to effectively resolve problems such as frequent international financial market volatility and the build-up of asset bubbles.

Third, uneven global development makes it difficult to meet people’s expectations for better lives. Dr. Schwab has observed in his book The Fourth Industrial Revolution that this round of industrial revolution will produce extensive and far-reaching impacts such as growing inequality, particularly the possible widening gap between return on capital and return on labor. The richest one percent of the world’s population own more wealth than the remaining 99 percent. Inequality in income distribution and uneven development space are worrying. Over 700 million people in the world are still living in extreme poverty. For many families, to have warm houses, enough food and secure jobs is still a distant dream. This is the biggest challenge facing the world today. It is also what is behind the social turmoil in some countries.

All this shows that there are indeed problems with world economic growth, governance and development models, and they must be resolved. The founder of the Red Cross Henry Dunant once said, “Our real enemy is not the neighboring country; it is hunger, poverty, ignorance, superstition and prejudice.” We need to have the vision to dissect these problems; more importantly, we need to have the courage to take actions to address them.

First, we should develop a dynamic, innovation-driven growth model. The fundamental issue plaguing the global economy is the lack of driving force for growth.Innovation is the primary force guiding development. Unlike the previous industrial revolutions, the fourth industrial revolution is unfolding at an exponential rather than linear pace. We need to relentlessly pursue innovation. Only with the courage to innovate and reform can we remove bottlenecks blocking global growth and development.

With this in mind, G-20 leaders reached an important consensus at the Hangzhou Summit, which is to take innovation as a key driver and foster new driving force of growth for both individual countries and the global economy. We should develop a new development philosophy and rise above the debate about whether there should be more fiscal stimulus or more monetary easing. We should adopt a multipronged approach to address both the symptoms and the underlying problems. We should adopt new policy instruments and advance structural reform to create more space for growth and sustain its momentum. We should develop new growth models and seize opportunities presented by the new round of industrial revolution and digital economy. We should meet the challenges of climate change and aging population. We should address the negative impact of IT application and automation on jobs. When cultivating new industries and new forms models of business models, we should create new jobs and restore confidence and hope to our peoples.

Second, we should pursue a well-coordinated and inter-connected approach to develop a model of open and win-win cooperation. Today, mankind has become a close-knit community of shared future. Countries have extensive converging interests and are mutually dependent. All countries enjoy the right to development. At the same time, they should view their own interests in a broader context and refrain from pursuing them at the expense of others.

We should commit ourselves to growing an open global economy to share opportunities and interests through opening-up and achieve win-win outcomes. One should not just retreat to the harbor when encountering a storm, for this will never get us to the other shore of the ocean. We must redouble efforts to develop global connectivity to enable all countries to achieve inter-connected growth and share prosperity. We must remain committed to developing global free trade and investment, promote trade and investment liberalization and facilitation through opening-up and say no to protectionism. Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war.

Third, we should develop a model of fair and equitable governance in keeping with the trend of the times. As the Chinese saying goes, people with petty shrewdness attend to trivial matters, while people with vision attend to governance of institutions. There is a growing call from the international community for reforming the global economic governance system, which is a pressing task for us. Only when it adapts to new dynamics in the international economic architecture can the global governance system sustain global growth.

Countries, big or small, strong or weak, rich or poor, are all equal members of the international community. As such, they are entitled to participate in decision-making, enjoy rights and fulfill obligations on an equal basis. Emerging markets and developing countries deserve greater representation and voice. The 2010 IMF quota reform has entered into force, and its momentum should be sustained. We should adhere to multilateralism to uphold the authority and efficacy of multilateral institutions. We should honor promises and abide by rules. One should not select or bend rules as he sees fit. The Paris Agreement is a hard-won achievement which is in keeping with the underlying trend of global development. All signatories should stick to it instead of walking away from it as this is a responsibility we must assume for future generations.

Fourth, we should develop a balanced, equitable and inclusive development model. As the Chinese saying goes, “A just cause should be pursued for common good.”Development is ultimately for the people. To achieve more balanced development and ensure that the people have equal access to opportunities and share in the benefits of development, it is crucial to have a sound development philosophy and model and make development equitable, effective and balanced.

Opening Plenary with Xi Jinping, President of the People's Republic of China in Davos, January 17, 2017. Copyright by World Economic Forum / Valeriano Di Domenico

Image: Valeriano Di Domenico

We should foster a culture that values diligence, frugality and enterprise and respects the fruits of hard work of all. Priority should be given to addressing poverty, unemployment, the widening income gap and the concerns of the disadvantaged to promote social equity and justice. It is important to protect the environment while pursuing economic and social progress so as to achieve harmony between man and nature and between man and society. The 2030 Agenda for Sustainable Development should be implemented to realize balanced development across the world.

A Chinese adage reads, “Victory is ensured when people pool their strength; success is secured when people put their heads together.” As long as we keep to the goal of building a community of shared future for mankind and work hand in hand to fulfill our responsibilities and overcome difficulties, we will be able to create a better world and deliver better lives for our peoples.

Ladies and Gentlemen,
Dear Friends,

China has become the world’s second largest economy thanks to 38 years of reform and opening-up. A right path leads to a bright future. China has come this far because the Chinese people have, under the leadership of the Communist Party of China, blazed a development path that suits China’s actual conditions.

This is a path based on China’s realities. China has in the past years succeeded in embarking on a development path that suits itself by drawing on both the wisdom of its civilization and the practices of other countries in both East and West. In exploring this path, China refuses to stay insensitive to the changing times or to blindly follow in others’ footsteps. All roads lead to Rome. No country should view its own development path as the only viable one, still less should it impose its own development path on others.

This is a path that puts people’s interests first. China follows a people-oriented development philosophy and is committed to bettering the lives of its people. Development is of the people, by the people and for the people. China pursues the goal of common prosperity. We have taken major steps to alleviate poverty and lifted over 700 million people out of poverty, and good progress is being made in our efforts to finish building a society of initial prosperity in all respects.

This is a path of pursuing reform and innovation. China has tackled difficulties and met challenges on its way forward through reform. China has demonstrated its courage to take on difficult issues, navigate treacherous rapids and remove institutional hurdles standing in the way of development. These efforts have enabled us to unleash productivity and social vitality. Building on progress of 30-odd years of reform, we have introduced more than 1,200 reform measures over the past four years, injecting powerful impetus into China’s development.

This is a path of pursuing common development through opening-up. China is committed to a fundamental policy of opening-up and pursues a win-win opening-up strategy. China’s development is both domestic and external oriented; while developing itself, China also shares more of its development outcomes with other countries and peoples.

China’s outstanding development achievements and the vastly improved living standards of the Chinese people are a blessing to both China and the world. Such achievements in development over the past decades owe themselves to the hard work and perseverance of the Chinese people, a quality that has defined the Chinese nation for several thousand years. We Chinese know only too well that there is no such thing as a free lunch in the world. For a big country with over 1.3 billion people, development can be achieved only with the dedication and tireless efforts of its own people. We cannot expect others to deliver development to China, and no one is in a position to do so. When assessing China’s development, one should not only see what benefits the Chinese people have gained, but also how much hard effort they have put in, not just what achievements China has made, but also what contribution China has made to the world. Then one will reach a balanced conclusion about China’s development.

Between 1950 and 2016, despite its modest level of development and living standard, China provided more than 400 billion yuan of foreign assistance, undertook over 5,000 foreign assistance projects, including nearly 3,000 complete projects, and held over 11,000 training workshops in China for over 260,000 personnel from other developing countries. Since it launched reform and opening-up, China has attracted over $1.7 trillion of foreign investment and made over $1.2 trillion of direct outbound investment, making huge contribution to global economic development. In the years following the outbreak of the international financial crisis, China contributed to over 30 percent of global growth every year on average. All these figures are among the highest in the world.

The figures speak for themselves. China’s development is an opportunity for the world; China has not only benefited from economic globalization but also contributed to it. Rapid growth in China has been a sustained, powerful engine for global economic stability and expansion. The inter-connected development of China and a large number of other countries has made the world economy more balanced. China’s remarkable achievement in poverty reduction has contributed to more inclusive global growth. And China’s continuous progress in reform and opening-up has lent much momentum to an open world economy.

We Chinese know only too well what it takes to achieve prosperity, so we applaud the achievements made by others and wish them a better future. We are not jealous of others’ success; and we will not complain about others who have benefited so much from the great opportunities presented by China’s development. We will open our arms to the people of other countries and welcome them aboard the express train of China’s development.

Ladies and Gentlemen,
Dear Friends,

I know you are all closely following China’s economic development, and let me give you an update on the state of China’s economy. China’s economy has entered what we call a new normal, in which major changes are taking place in terms of growth rate, development model, economic structure and drivers of growth. But the economic fundamentals sustaining sound development remain unchanged.

Despite a sluggish global economy, China’s economy is expected to grow by 6.7 percent in 2016, still one of the highest in the world. China’s economy is far bigger in size than in the past, and it now generates more output than it did with double-digit growth in the past. Household consumption and the services sector have become the main drivers of growth. In the first three quarters of 2016, added value of the tertiary industry took up 52.8 percent of the GDP and domestic consumption contributed to 71 percent of economic growth. Household income and employment have steadily risen, while per unit GDP energy consumption continues to drop. Our efforts to pursue green development are paying off.

The Chinese economy faces downward pressure and many difficulties, including acute mismatch between excess capacity and an upgrading demand structure, lack of internal driving force for growth, accumulation of financial risks, and growing challenges in certain regions. We see these as temporary hardships that occur on the way forward. And the measures we have taken to address these problems are producing good results. We are firm in our resolve to forge ahead. China is the world’s largest developing country with over 1.3 billion people, and their living standards are not yet high. But this reality also means China has enormous potential and space for development. Guided by the vision of innovative, coordinated, green, open and shared development, we will adapt to the new normal, stay ahead of the curve, and make coordinated efforts to maintain steady growth, accelerate reform, adjust economic structure, improve people’s living standards and fend off risks. With these efforts, we aim to achieve medium-high rate of growth and upgrade the economy to higher end of the value chain.

China will strive to enhance the performance of economic growth. We will pursue supply-side structural reform as the general goal, shift the growth model and upgrade the economic structure. We will continue to cut overcapacity, reduce inventory, deleverage financing, reduce cost and strengthen weak links. We will foster new drivers of growth, develop an advanced manufacturing sector and upgrade the real economy. We will implement the Internet Plus action plan to boost effective demand and better meet the individualized and diverse needs of consumers. And we will do more to protect the ecosystem.

China will boost market vitality to add new impetus to growth. We will intensify reform efforts in priority areas and key links and enable the market to play a decisive role in resources allocation. Innovation will continue to feature prominently on our growth agenda. In pursuing the strategy of innovation-driven development, we will bolster the strategic emerging industries, apply new technologies and foster new business models to upgrade traditional industries; and we will boost new drivers of growth and revitalize traditional ones.

China will foster an enabling and orderly environment for investment. We will expand market access for foreign investors, build high-standard pilot free trade zones, strengthen protection of property rights, and level the playing field to make China’s market more transparent and better regulated. In the coming five years, China is expected to import $8 trillion of goods, attract $600 billion of foreign investment and make $750 billion of outbound investment. Chinese tourists will make 700 million overseas visits. All this will create a bigger market, more capital, more products and more business opportunities for other countries. China’s development will continue to offer opportunities to business communities in other countries. China will keep its door wide open and not close it. An open door allows both other countries to access the Chinese market and China itself to integrate with the world. And we hope that other countries will also keep their door open to Chinese investors and keep the playing field level for us.

China will vigorously foster an external environment of opening-up for common development. We will advance the building of the Free Trade Area of the Asia Pacific and negotiations of the Regional Comprehensive Economic Partnership to form a global network of free trade arrangements. China stands for concluding open, transparent and win-win regional free trade arrangements and opposes forming exclusive groups that are fragmented in nature. China has no intention to boost its trade competitiveness by devaluing the RMB, still less will it launch a currency war.

Over three years ago, I put forward the “Belt and Road” initiative. Since then, over 100 countries and international organizations have given warm responses and support to the initiative. More than 40 countries and international organizations have signed cooperation agreements with China, and our circle of friends along the “Belt and Road” is growing bigger. Chinese companies have made over $50 billion of investment and launched a number of major projects in the countries along the routes, spurring the economic development of these countries and creating many local jobs. The “Belt and Road” initiative originated in China, but it has delivered benefits well beyond its borders.

In May this year, China will host in Beijing the Belt and Road Forum for International Cooperation, which aims to discuss ways to boost cooperation, build cooperation platforms and share cooperation outcomes. The forum will also explore ways to address problems facing global and regional economy, create fresh energy for pursuing inter-connected development and make the “Belt and Road” initiative deliver greater benefits to people of countries involved.

Ladies and Gentlemen,
Dear Friends,

World history shows that the road of human civilization has never been a smooth one, and that mankind has made progress by surmounting difficulties. No difficulty, however daunting, will stop mankind from advancing. When encountering difficulties, we should not complain about ourselves, blame others, lose confidence or run away from responsibilities. We should join hands and rise to the challenge. History is created by the brave. Let us boost confidence, take actions and march arm-in-arm toward a bright future.

Thank you.


Time: Introduction to the Bretton Woods System
Tuesday, Oct. 21, 2008

Bretton Woods System

Since the end of World War II, the U.S. dollar has enjoyed a unique and powerful position in international trade. But perhaps no more.

Before boarding a plane on Saturday to meet President George W. Bush, French President Nicolas Sarkozy proclaimed, “Europe wants it. Europe demands it. Europe will get it.” The “it” here is global financial reform, and evidently Sarkozy won’t have to wait long. Just hours after their closed-door meeting had finished, Bush and Sarkozy, along with European Commission President Jose Manuel Barroso, issued a joint statement announcing that a summit would be held next month to devise what Barroso calls a “new global financial order.”

The old global financial order is, well, old. Established in 1944 and named after the New Hampshire town where the agreements were drawn up, the Bretton Woods system created an international basis for exchanging one currency for another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank. The former was designed to monitor exchange rates and lend reserve currencies to nations with trade deficits, the latter to provide underdeveloped nations with needed capital — although each institution’s role has changed over time. Each of the 44 nations who joined the discussions contributed a membership fee, of sorts, to fund these institutions; the amount of each contribution designated a country’s economic ability and dictated its number of votes.

In an effort to free international trade and fund postwar reconstruction, the member states agreed to fix their exchange rates by tying their currencies to the U.S. dollar. American politicians, meanwhile, assured the rest of the world that its currency was dependable by linking the U.S. dollar to gold; $1 equaled 35 oz. of bullion. Nations also agreed to buy and sell U.S. dollars to keep their currencies within 1% of the fixed rate. And thus the golden age of the U.S. dollar began.

For his part, legendary British economist John Maynard Keynes, who drafted much of the plan, called it “the exact opposite of the gold standard,” saying the negotiated monetary system would be whatever the controlling nations wished to make of it. Keynes had even gone so far as to propose a single, global currency that wouldn’t be tied to either gold or politics. (He lost that argument).

Though it came on the heels of the Great Depression and the beginning of the end of World War II, the Bretton Woods system addressed global ills that began as early as the first World War, when governments (including the U.S.) began controlling imports and exports to offset wartime blockades. This, in turn, led to the manipulation of currencies to shape foreign trade. Currency warfare and restrictive market practices helped spark the devaluation, deflation and depression that defined the economy of the 1930s.

The Bretton Woods system itself collapsed in 1971, when President Richard Nixon severed the link between the dollar and gold — a decision made to prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands. By 1973, most major world economies had allowed their currencies to float freely against the dollar. It was a rocky transition, characterized by plummeting stock prices, skyrocketing oil prices, bank failures and inflation.

It seems the East Coast might yet again be the backdrop for a massive overhaul of the world’s financial playbook. U.N. Secretary-General Ban Ki-moon publicly backed calls for a summit before the new year, saying the agency’s headquarters in New York — the very “symbol of multilateralism” — should play host. Sarkozy concurred, but for different reasons: “Insofar as the crisis began in New York,” he said, “then the global solution must be found to this crisis in New York.”

Economist: What was decided at the Bretton Goods Summit?

The Economist explains

Explaining the world, daily

The Economist explains

What was decided at the Bretton Woods summit

ON JULY 1ST 1944 the rich world’s finance experts convened in a hotel in the New Hampshire mountains to discuss the post-war monetary system. The Bretton Woods system that emerged from the conference saw the creation of two global institutions that still play important roles today, the International Monetary Fund (IMF) and the World Bank. It also instituted a fixed exchange-rate system that lasted until the early 1970s. A key motivation for participants at the conference was a sense that the inter-war financial system had been chaotic, seeing the collapse of the gold standard, the Great Depression and the rise of protectionism. Henry Morgenthau, America’s Treasury secretary, declared that the conference should “do away with the economic evils—the competitive devaluation and destructive impediments to trade—which preceded the present war.” But the conference had to bridge a tricky transatlantic divide. Its intellectual leader was John Maynard Keynes, the British economist, but the financial power belonged to Harry Dexter White, acting as American President Roosevelt’s representative.

The strain of maintaining fixed exchange rates had proved too much for countries in the past, especially when their trade accounts fell into deficit. The role of the IMF was designed to deal with this problem, by acting as an international lender of last resort. But while White, as the representative of a creditor nation (and one with a trade surplus), wanted all the burden of adjustment to fall on the debtors, Keynes wanted constraints on the creditors as well. He wanted an international balance-of-payments clearing mechanism based, not on the dollar, but a new currency called bancor. White worried that America would end up being paid for its exports in “funny money”; Keynes lost the argument. Ironically enough, now that America is a net debtor, White’s administrative successors have called for creditors to bear part of the adjustment when trade balances get out of line.

The Bretton Woods exchange-rate system saw all currencies linked to the dollar, and the dollar linked to gold. To prevent speculation against currency pegs, capital flows were severely restricted. This system was accompanied by more than two decades of rapid economic growth, and a relative paucity of financial crises. But in the end it proved too inflexible to deal with the rising economic power of Germany and Japan, and America’s reluctance to adjust its domestic economic policy to maintain the gold peg. President Nixon abandoned the link to gold in 1971 and the fixed exchange-rate system disintegrated.

Both the IMF and World Bank survived. But each has fierce critics, not least for their perceived domination by the rich world. The IMF has been criticised for the conditions it attaches to loans, which have been seen as too focused on austerity and the rights of creditors and too little concerned with the welfare of the poor. The World Bank, which has mainly focused on loans to developing countries, has been criticised for failing to pay sufficient attention to the social and environmental consequences of the projects it funds. It is hard to believe that either institution will be around in another 70 years’ time unless they change to reflect the growing power of emerging markets, particularly China.

Dig deeper:
The IMF suggests new rules for broke countries(June 2014)
Congress’s failure to support the IMF is shameful(March 2014)
The history of Britain’s relationship with the IMF is unusual

Economist: Beyond Bretton Woods 2

The global monetary system

Beyond Bretton Woods 2

Is there a better way to organise the world’s currencies?

WHEN the leaders of the Group of Twenty (G20) countries meet in Seoul on November 11th and 12th, there will be plenty of backstage finger-pointing about the world’s currency tensions. American officials blame China’s refusal to allow the yuan to rise faster. The Chinese retort that the biggest source of distortion in the global economy is America’s ultra-loose monetary policy—reinforced by the Federal Reserve’s decision on November 3rd to restart “quantitative easing”, or printing money to buy government bonds (see article). Other emerging economies cry that they are innocent victims, as their currencies are forced up by foreign capital flooding into their markets and away from low yields elsewhere.

These quarrels signify a problem that is more than superficial. The underlying truth is that no one is happy with today’s international monetary system—the set of rules, norms and institutions that govern the world’s currencies and the flow of capital across borders.

There are three broad complaints. The first concerns the dominance of the dollar as a reserve currency and America’s management of it. The bulk of foreign-exchange transactions and reserves are in dollars, even though the United States accounts for only 24% of global GDP (see chart 1). A disproportionate share of world trade is conducted in dollars. To many people the supremacy of the greenback in commerce, commodity pricing and official reserves cannot be sensible. Not only does it fail to reflect the realities of the world economy; it leaves others vulnerable to America’s domestic monetary policy.

The second criticism is that the system has fostered the creation of vast foreign-exchange reserves, particularly by emerging economies. Global reserves have risen from $1.3 trillion (5% of world GDP) in 1995 to $8.4 trillion (14%) today. Emerging economies hold two-thirds of the total. Most of their hoard has been accumulated in the past ten years (see chart 2).

These huge reserves offend economic logic, since they mean poor countries, which should have abundant investment opportunities of their own, are lending cheaply to richer ones, mainly America. Such lending helped precipitate the financial crisis by pushing down America’s long-term interest rates. Today, with Americans saving rather than spending, they represent additional thrift at a time when the world needs more demand.

The third complaint is about the scale and volatility of capital flows. Financial crises have become more frequent in the past three decades. Many politicians argue that a financial system in which emerging economies can suffer floods of foreign capital (as now) or sudden droughts (as in 1997-98 and 2008) cannot be the best basis for long-term growth.

France, which assumes the chairmanship of the G20 after the Seoul summit, thinks the world can do better. Nicolas Sarkozy, the country’s president, wants to put international monetary reform at the top of the group’s agenda for the next year. He wants a debate “without taboos” on how to improve an outdated system.

Such a debate has in fact been going on sporadically for decades. Ever since the post-war Bretton Woods system of fixed but adjustable exchange rates fell apart in the 1970s, academics have offered Utopian blueprints for a new version. The question is: what improvements are feasible?

The shape of any monetary system is constrained by what is often called the “trilemma” of international economics. If capital can flow across borders, countries must choose between fixing their currencies and controlling their domestic monetary conditions. They cannot do both. Under the classical 19th-century gold standard, capital flows were mostly unfettered and currencies were tied to gold. The system collapsed largely because it allowed governments no domestic monetary flexibility. In the Bretton Woods regime currencies were pegged to the dollar, which in turn was tied to gold. Capital mobility was limited, so that countries had control over their own monetary conditions. The system collapsed in 1971, mainly because America would not subordinate its domestic policies to the gold link.

Today’s system has no tie to gold or any other anchor, and contains a variety of exchange-rate regimes and capital controls. Most rich countries’ currencies float more or less freely—although the creation of the euro was plainly a step in the opposite direction. Capital controls were lifted three decades ago and financial markets are highly integrated.

Broadly, emerging economies are also seeing a freer flow of capital, thanks to globalisation as much as to the removal of restrictions. Net private flows to these economies are likely to reach $340 billion this year, up from $81 billion a decade ago. On paper, their currency regimes are also becoming more flexible. About 40% of them officially float their currencies, up from less than 20% 15 years ago. But most of these floats are heavily managed. Countries are loth to let their currencies move freely. When capital pours in, central banks buy foreign exchange to stem their rise.

They do this in part because governments do not want their exchange rates to soar suddenly, crippling exporters. Many of them are worried about level as well as speed: they want export-led growth—and an undervalued currency to encourage it.

Just as important are the scars left by the financial crises of the late 1990s. Foreign money fled, setting off deep recessions. Governments in many emerging economies concluded that in an era of financial globalisation safety lay in piling up huge reserves. That logic was reinforced in the crisis of 2008, when countries with lots of reserves, such as China or Brazil, fared better than those with less in hand. Even with reserves worth 25% of GDP, South Korea had to turn to the Fed for an emergency liquidity line of dollars.

This experience is forcing a rethink of what makes a “safe” level of reserves. Economists used to argue that developing countries needed foreign exchange mainly for emergency imports and short-term debt payments. A popular rule of thumb in the 1990s was that countries should be able to cover a year’s worth of debt obligations. Today’s total far exceeds that.

Among emerging economies, China plays by far the most influential role in the global monetary system. It is the biggest of them, and its currency is in effect tied to the dollar. The yuan is widely held to be undervalued, though it has risen faster in real than in nominal terms (see article). And because China limits capital flows more extensively and successfully than others, it has been able to keep the yuan cheap without stoking consumer-price inflation.

China alone explains a large fraction of the global build-up of reserves (see chart 3). Its behaviour also affects others. Many other emerging economies, especially in Asia, are reluctant to risk their competitiveness by letting their currencies rise by much. As a result many of the world’s most vibrant economies in effect shadow the dollar, in an arrangement that has been dubbed “Bretton Woods 2”.

History lessons

The similarities between this quasi-dollar standard and the original Bretton Woods system mean that many of today’s problems have historical parallels. Barry Eichengreen of the University of California, Berkeley, explores these in “Exorbitant Privilege”, a forthcoming book about the past and future of the international monetary system.

Consider, for instance, the tension between emerging economies’ demand for reserves and their fear that the main reserve currency, the dollar, may lose value—a dilemma first noted in 1947 by Robert Triffin, a Belgian economist. When the world relies on a single reserve currency, Triffin argued, that currency’s home country must issue lots of assets (usually government bonds) to lubricate global commerce and meet the demand for reserves. But the more bonds it issues, the less likely it will be to honour its debts. In the end, the world’s insatiable demand for the “risk-free” reserve asset will make that asset anything but risk-free. As an illustration of the modern thirst for dollars, the IMF reckons that at the current rate of accumulation global reserves would rise from 60% of American GDP today to 200% in 2020 and nearly 700% in 2035.

If those reserves were, as today, held largely in Treasury bonds, America would struggle to sustain the burden. Unless it offset its Treasury liabilities to the rest of the world by acquiring foreign assets, it would find itself ever deeper in debt to foreigners. Triffin’s suggested solution was to create an artificial reserve asset, tied to a basket of commodities. John Maynard Keynes had made a similar proposal a few years before, calling his asset “Bancor”. Keynes’s idea was squashed by the Americans, who stood to lose from it. Triffin’s was also ignored for 20 years.

But in 1969, as the strains between America’s budget deficit and the dollar’s gold peg emerged, an artificial reserve asset was created: the Special Drawing Right (SDR), run by the IMF. An SDR’s value is based on a basket of the dollar, euro, pound and yen. The IMF’s members agree on periodic allocations of SDRs, which countries can convert into other currencies if need be. However, use of SDRs has never really taken off. They make up less than 5% of global reserves and there are no private securities in SDRs.

Some would like that to change. Zhou Xiaochuan, the governor of China’s central bank, caused a stir in March 2009 when he argued that the SDR should become a true global reserve asset to replace the dollar. Mr Sarkozy seems to think similarly, calling for a multilateral approach to the monetary system. If commodities were priced in SDRs, the argument goes, their prices would be less volatile. And if countries held their reserves in SDRs, they would escape the Triffin dilemma.

For SDRs to play this role, however, they would have to be much more plentiful. The IMF agreed on a $250 billion allocation among measures to fight the financial crisis, but global reserves are rising by about $700 billion a year. Even if there were lots more SDRs it is not clear why governments would want to hold them. The appeal of the dollar is that it is supported by the most liquid capital markets in the world. Few countries are likely to use SDRs much until there are deep private markets in SDR-denominated assets.

Only if the IMF evolved into a global central bank able to issue them at speed could SDRs truly become a central reserve asset. This is highly unlikely. As Mr Eichengreen writes: “No global government… means no global central bank, which means no global currency. Full stop.”

Nor is it clear that the SDR is really needed as an alternative to the dollar. The euro is a better candidate. This year’s fiscal crises notwithstanding, countries could shift more reserves into euros if America mismanaged its finances or if they feared it would. This could happen fast. Mr Eichengreen points out that the dollar had no international role in 1914 but had overtaken sterling in governments’ reserves by 1925.

Alternatively, China could create a rival to the dollar if it let the yuan be used in transactions abroad. China has taken some baby steps in this direction, for instance by allowing firms to issue yuan-denominated bonds in Hong Kong. However, an international currency would demand far bigger changes. Some observers argue that China’s championing of the SDR is a means to this end: if the yuan, for instance, became part of the SDR basket, foreigners could have exposure to yuan assets.

More likely, China is looking for a way to offload some of the currency risk in its stash of dollars. As the yuan appreciates against the dollar (as it surely will) those reserves will be worth less. If China could swap dollars for SDRs, some exchange-rate risk would be shifted to the other members of the IMF. A similar idea in the 1970s foundered because the IMF’s members could not agree on who would bear the currency risk. America refused then and surely would now.

Rather than try to create a global reserve asset, reformers might achieve more by reducing the demand for reserves. This could be done by improving countries’ access to funds in a crisis. Here the G20 has made a lot of progress under South Korea’s leadership. The IMF’s lending facilities have been overhauled, so that well-governed countries can get unlimited funds for two years.

Overcome your reserve

So far only a few emerging economies, such as Mexico and Poland, have signed up, not least because of the stigma attached to any hint of a loan from the IMF. Perhaps others could be persuaded to join (best of all, in a large group). Reviving and institutionalising the swap arrangements between the Fed and emerging economies set up temporarily during the financial crisis might also reduce the demand for reserves as insurance. Also, regional efforts to pool reserves could be strengthened.

However, even if they have access to emergency money, governments will still want to hoard reserves if they are determined to hold their currencies down. That is why many reformers think the international monetary system needs sanctions, imposed by the IMF or the World Trade Organisation (WTO), against countries that “manipulate” their currencies or run persistent surpluses.

This is another idea with a history. Along with Bancor, Keynes wanted countries with excessive surpluses to be fined, not least because of what happened during the Depression, when currency wars and gold-hoarding made the world’s troubles worse. The idea went nowhere because America, then a surplus economy, called the shots at the Bretton Woods conference in 1944. The same forces are evident today—except that America, as a deficit country, is on the other side of the argument. Like America in the 1940s, China would never agree to reforms that penalised surplus countries.

Such rules would probably be unenforceable anyway. Harsh penalties in international economic agreements are rarely effective: remember Europe’s Stability and Growth Pact? Modest co-operation has better prospects. Just as the Plaza Accord in 1985 was designed to weaken the dollar and narrow America’s current-account deficit, so the G20 could develop a plan for rebalancing the world economy, perhaps with target ranges for current-account balances and real exchange rates. These would be supported by peer pressure rather than explicit sanctions.

A rebalancing plan, which included faster real appreciation of the yuan, would remove many of the tensions in the monetary system. But shifting the resources of China and other surplus countries from exports to consumption will take time.

Meanwhile, capital flows into emerging markets are likely to surge much faster. This is partly due to America’s quantitative easing: cheap money will encourage investors to seek higher yields where they can find them. It is also partly due to the growth gap between vibrant emerging economies and stagnant rich ones. And it reflects the under-representation of emerging-market assets in investors’ portfolios.

For the past decade emerging economies have responded to these surges largely by amassing reserves. They need other options. One, adopted by Brazil, South Korea, Thailand and others, and endorsed by the IMF, is to impose or increase taxes and regulations to slow down inflows. Some academics have suggested drawing up a list of permissible devices, much as the WTO has a list of legitimate trade barriers.

This is a sensible plan, but it has its limits. Capital-inflow controls can temporarily stem a flood of foreign cash. However, experience, notably Chile’s in the 1990s, suggests that controls alter the composition but not the amount of foreign capital; and they do not work indefinitely. As trade links become stronger, finance will surely become more integrated too.

Other tools are available. Tighter fiscal policy in emerging economies, for instance, could lessen the chance of overheating. Stricter domestic financial regulation would reduce the chances of a credit binge. Countries from Singapore to Israel have been adding, or tightening, prudential rules such as maximum loan-to-value ratios on mortgages.

But greater currency flexibility will also be needed. The trilemma of international economics dictates it: if capital is mobile, currency rigidity will eventually lead to asset bubbles and inflation. Unless countries are willing to live with such booms—and the busts that follow—Bretton Woods 2 will have to evolve into a system that mirrors the rich world’s, with integrated capital markets and floating currencies.

Although the direction is clear, the pace is not. The pressure of capital flows will depend on the prospects for rich economies, particularly America’s, as well as the actions of the Fed. Emerging economies’ willingness to allow their currencies to move will depend on what China does—and China, because its capital controls are more extensive and effective than others’, can last with a currency peg for longest.

If America’s economy recovers and its medium-term fiscal outlook improves, the pace at which capital shifts to the emerging world will slow. If China makes its currency more flexible and its capital account more open in good time, the international monetary system will be better able to cope with continued financial globalisation and a wide growth gap between rich and emerging markets. But if the world’s biggest economy stagnates and the second-biggest keeps its currency cheap and its capital account closed, a rigid monetary system will eventually buckle.

#Discussion on World Order# Martin Wolf: The long and painful journey to world disorder

In a long commentary on the Financial Times, Martin Wolf argues that we are now living “in an era of strident nationalism and xenophobia”.  The world does not look hopeful with the rise of nationalist strongmen leaders such as Trump, Le Pen, Putin and Xi Jinping.  If anything can be learned from history,

The contemporary global economic and political system originated as a reaction against the disasters of the first half of the 20th century. The latter, in turn, were caused by the unprecedented, but highly uneven, economic progress of the 19th century.

The transformational forces unleashed by industrialisation stimulated class conflict, nationalism and imperialism. Between 1914 and 1918, industrialised warfare and the Bolshevik revolution ensued. The attempted restoration of the pre-first world war liberal order in the 1920s ended with the Great Depression, the triumph of Adolf Hitler and the Japanese militarism of the 1930s. This then created the conditions for the catastrophic slaughter of the second world war, to be followed by the communist revolution in China. In the aftermath of the second world war, the world was divided between two camps: liberal democracy and communism. The US, the world’s dominant economic power, led the former and the Soviet Union the latter. With US encouragement, the empires controlled by enfeebled European states disintegrated, creating a host of new countries in what was called the “third world”.

Contemplating the ruins of European civilisation and the threat from communist totalitarianism, the US, the world’s most prosperous economy and militarily powerful country, used not only its wealth but also its example of democratic self-government, to create, inspire and underpin a transatlantic west. In so doing, its leaders consciously learnt from the disastrous political and economic mistakes their predecessors made after its entry into the first world war in 1917. Domestically, the countries of this new west emerged from the second world war with a commitment to full employment and some form of welfare state. Internationally, a new set of institutions — the International Monetary Fund, the World Bank, the General Agreement on Tariffs and Trade (ancestor of today’s World Trade Organisation) and the Organisation for European Economic Co-operation (the instrument of the Marshall Plan, later renamed the Organisation for Economic Co-operation and Development) — oversaw the reconstruction of Europe and promoted global economic development. Nato, the core of the western security system, was founded in 1949. The Treaty of Rome, which established the European Economic Community, forefather of the EU, was signed in 1957. This creative activity came partly in response to immediate pressures, notably the postwar European economic misery and the threat from Stalin’s Soviet Union. But it also reflected a vision of a more co-operative world.


Donald Trump and the New Economic Order


Photo of Michael Spence

Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Academic Board Chairman of the Asia Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.

Donald Trump and the New Economic Order

HONG KONG – Since the end of World War II, the hierarchy of economic priorities has been relatively clear. At the top was creating an open, innovative, and dynamic market-driven global economy, in which all countries can (in principal) thrive and grow. Coming in second – one might even say a distant second – was generating vigorous, sustainable, and inclusive national growth patterns. No more.

In fact, a reversal seems to be underway. Achieving strong inclusive national-level growth to revive a declining middle class, kick-start stagnant incomes, and curtail high youth unemployment is now taking precedence. Mutually beneficial international arrangements governing flows of goods, capital, technology, and people (the four key flows in the global economy) are appropriate only when they reinforce – or, at least, don’t undermine – progress on meeting the highest priority.

This reversal became apparent in June, when Britons – including those who benefit significantly from the existing open economic and financial system – voted to leave the European Union, based on what might be called the sovereignty principle. EU institutions were perceived to be undermining Britain’s capacity to boost its own economy, regulate immigration, and control its destiny.

A similar view has been animating nationalist and populist political movements across Europe, many of which believe that supra-national arrangements should come second to domestic prosperity. The EU – which actually does, in its current configuration, leave its member governments short of policy tools to meet their citizens’ evolving needs – is an easy target.

But even without such institutional arrangements, there is a sense that emphasizing international markets and linkages can hamper a country’s capacity to advance its own interests. Donald Trump’s victory in the United States’ presidential election made that abundantly clear.

In keeping with Trump’s main campaign slogan, “Make America Great Again,” it was his “America first” comments that were most revealing. While Trump might pursue mutually beneficial bilateral agreements, one can expect that they will be subordinated to domestic priorities, especially distributional aims, and supported only insofar as they are consistent with these priorities.

Developed-country voters’ frustration with the old market-driven global economic architecture is not unfounded. That order did allow powerful forces, at times beyond the control of elected officials and policymakers, to shape national economies. It may be true that some of that order’s elites chose to ignore the adverse distributional and employment-related consequences of the old order, while reaping the benefits. But it is also true that the old order, taken as sacrosanct, hampered elites’ capacity to address such problems, even if they tried.

This was not always the case. In the wake of WWII, the US, motivated partly by the Cold War, helped to create the old order by facilitating economic recovery in the West and, over time, creating growth opportunities for developing countries. For 30 years or so, the distributional aspects of the global growth patterns that these efforts underpinned were positive, both for individual countries and for the world as a whole. Compared with anything that came before, the post-war order was a boon for inclusiveness.

But nothing lasts forever. As inequality across countries has declined, inequality within countries has surged – to the point that the reversal of priorities was probably inevitable. Now that the reversal has arrived, so have the consequences. While it is difficult to say precisely what those will be, some seem fairly clear.

For starters, the US will be more reluctant to absorb a disproportionate share of the cost of providing global public goods. While other countries will eventually pick up the slack, there will be a transition period of unknown duration, during which the supply of such goods may decline, potentially undermining stability. For example, the terms of engagement in NATO are likely to be renegotiated.

Multilateralism – long enabled by the same sort of asymmetric contribution, though typically proportionate to countries’ income and wealth – will also lose steam, as the trend toward bilateral and regional trade and investment agreements accelerates. Trump is likely to be a leading proponent of this tack; in fact, even regional trade deals may be ruled out, as his opposition to ratifying the 12-country Trans-Pacific Partnership suggests.

This creates an opportunity for China to lead the establishment of a trade pact for Asia – an opportunity that Chinese leaders are already set to seize. In conjunction with its “one belt, one road” strategy and its creation of the Asian Infrastructure Investment Bank, China’s influence in the region will expand significantly as a result.

Meanwhile, for developing countries that lack China’s economic might, the trend away from multilateralism could hurt. Whereas poor and less-developed countries found opportunities to grow and prosper under the old order, they will struggle to negotiate effectively on a bilateral basis. The hope is that the world will recognize its collective interest in keeping development pathways open for poorer countries, both for these countries’ benefit and for the sake of international peace and security.

Beyond trade, technology is another powerful global force that is likely to be treated differently in the new order, becoming subject to more national-level regulations. Cyber threats will all but require some regulations and will demand evolving policy interventions. But other threats – for example, the fake news that has proliferated in the West (and, in particular, in the US during the presidential campaign) – may also call for a more hands-on approach. And the adoption of work-displacing digital technologies may need to be paced, so that the economy’s structural adjustment can keep up.

The new emphasis on national interests clearly has costs and risks. But it may also bring important benefits. A global economic order sitting atop a crumbling foundation – in terms of democratic support and national political and social cohesion – is not stable. As long as people’s identities are mainly organized, as they are now, around citizenship in nation-states, a country-first approach may be the most effective. Like it or not, we are about to find out.

© 1995-2017 Project Syndicate


See also:

Brexit, Trump and a new economic order