China better eco­nomic choice than US for EU

China Daily - - VIEWS - The au­thor is global head of re­search at Ash­more In­vest­ment Man­age­ment.

The United King­dom and the Euro­pean Union face a crit­i­cal choice about the di­rec­tion of future trade poli­cies with the rest of the world. Should the EU deepen its al­ready heavy ex­po­sure to the United States even as the coun­try turns in­ward, or should it be­gin to di­ver­sify its trade re­la­tions to­ward a less fa­mil­iar al­beit in­creas­ingly pros­per­ous China?

From an eco­nomic per­spec­tive, the EU should be­gin di­ver­si­fy­ing its out­look, and China should cer­tainly be on its radar. The Don­ald Trump ad­min­is­tra­tion is mov­ing away from long-stand­ing com­mit­ments to sound fis­cal pol­icy and free trade, which sup­ported the US’ eco­nomic growth for the past few decades. In­fla­tion and cur­rency risks due to US trade deficits are ris­ing over the near-term in ad­di­tion to the po­ten­tial ad­verse con­se­quences for the EU’s trade with the US over the longer term.

Emerg­ing mar­ket in­vestors are fa­mil­iar with late-cy­cle eco­nomic pop­ulism of the kind cur­rently on dis­play in the US. In clear par­al­lel with the cur­rent US sit­u­a­tion, the Nestor Kirch­ner ad­min­is­tra­tion in Ar­gentina failed to tran­si­tion from de­mand stim­u­lus to sup­ply-side re­form as the coun­try’s econ­omy ap­proached full em­ploy­ment after the 2001 cri­sis. By the mid-2000s, Ar­gentina was al­ready be­gin­ning to over­heat and trade deficits were widen­ing. In­ter­ven­tions in the free op­er­a­tion of mar­kets fol­lowed, in­clud­ing im­pos­ing tar­iffs and re­stric­tions on the free move­ment of la­bor and cap­i­tal, which raised costs and dis­rupted sup­ply chains. Pro­tec­tion­ism then led to greater pub­lic spend­ing as the gov­ern­ment sought to shore up the ailing econ­omy, which only in­creased in­debt­ed­ness. This weighed on pri­vate in­vest­ment and even­tu­ally pushed up un­em­ploy­ment.

The US is head­ing in a sim­i­lar di­rec­tion, and we know this of­ten ends in stag­na­tion, in­fla­tion, cur­rency de­base­ment, po­lit­i­cal in­sta­bil­ity and even cri­sis. Thus, it is patently not in the in­ter­ests of the EU to fol­low the US down this road.

This is why the emer­gence of China as an eco­nomic power and thought-leader on good eco­nomic poli­cies is in­creas­ingly im­por­tant to the EU and the rest of the world. China is pur­su­ing poli­cies us­ing a different ap­proach than the Trump ad­min­is­tra­tion. Specif­i­cally, China is delever­ag­ing rather than build­ing up debt, and push­ing for greater glob­al­iza­tion rather than with­draw­ing from the world. China is fur­ther open­ing up its mar­kets as well as fa­cil­i­tat­ing in­ter­na­tional trade via the Belt and Road Ini­tia­tive. Th­ese poli­cies are sus­tain­able, en­sure sta­bil­ity and are con­sis­tent with higher-trend growth rates than pro­tec­tion­ist poli­cies.

But the EU should not just look to China for just near-term sta­bil­ity. It can also de­rive ma­jor long-term ben­e­fits by deep­en­ing re­la­tions with the world’s most pop­u­lous coun­try. The main thrust of China’s eco­nomic pol­icy is to raise do­mes­tic de­mand as the econ­omy piv­ots away from ex­port-led growth. Stronger con­sump­tion in China should be good news for EU ex­porters. China’s econ­omy is not only still in the early stages of open­ing-up, but also has a sav­ings rate of nearly 50 per­cent. This means the EU can re­li­ably ex­pect China’s con­sumers to emerge as the sin­gle-largest source of de­mand in the world over the next cou­ple of decades.

By con­trast, the out­look for US con­sump­tion over the next few decades is less ex­hil­a­rat­ing. As in­ter­est rates go up, the cost of ser­vic­ing the US’ enor­mous debt stock of 526 per­cent of GDP will only rise, and this will eat into con­sumer spend­ing and hurt in­vest­ment.

Trade re­la­tions are about short-term risks and long-term gains. Sus­tain­able ex­pan­sion only hap­pens in economies that con­stantly re­form and man­age their debt to im­prove pro­duc­tiv­ity. Greater pro­duc­tiv­ity in turn en­sures do­mes­tic de­mand can ex­pand in a sus­tain­able man­ner — that is, with­out jeop­ar­dis­ing ex­ter­nal bal­ances and price sta­bil­ity. Sta­ble strong growth also begets sta­ble em­ploy­ment, which leads to sta­ble pol­i­tics. The EU will find all th­ese char­ac­ter­is­tics in China to­day. In the US, on the other hand, the EU looks at an over­stim­u­lated and un­der-re­formed econ­omy on an un­sus­tain­able path of over­heat­ing and debt prob­lems with the added drag from pro­tec­tion­ism, which may ul­ti­mately tar­get the EU. China and the US, there­fore, of­fer dif­fer­ing prospects for future de­vel­op­ment. The pru­dent path for the EU is to be­gin to di­lute its heavy ex­po­sure to the US in fa­vor of more busi­ness with China, ide­ally be­fore it re­ally starts to hurt.

The pru­dent path for the EU is to be­gin to di­lute its heavy ex­po­sure to the US in fa­vor of more busi­ness with China, ide­ally be­fore it re­ally starts to hurt.

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