COMPELLING READ: Former top Asian banker Stephen Roach, now at Yale, argues that were Mitt Romney to win the presidency in November things would go wrong… fast.
How Romney could go wrong from Day 1
By Stephen Roach
True to his word as a candidate, a few hours after taking office as US president on January 20, 2013, Mitt Romney issued his first executive order, declaring China guilty of currency manipulation. In accordance with the Omnibus Trade and Competitiveness Act of 1988, President Romney’s act triggered immediate negotiations between US and Chinese officials. But the negotiations stalled and both parties blamed the other in press releases.
In early February, in his first State of the Union address, Mr Romney said: “Enough is enough. It is high time for China to play by our rules.” Congress roared its approval and within a week, overwhelming bipartisan majorities of both houses passed the Defend America Trade Act of 2013. Modelled on the currency manipulation “remedies” of countervailing tariffs first proposed in 2005, DATA was signed into law on President’s Day, February 18 2013. China was quickly deemed to
be in violation of the new statute.
At that point negotiations took on a new urgency. But the new leaders in both countries were in no mood for compromise and the talks failed.
In accordance with the provisions of DATA, Washington slapped immediate tariffs of 20 per cent on all Chinese products entering the US.
As plants shut down across China, Beijing declared this to be an act of economic war and filed a complaint with the World Trade Organisation. Li Keqiang, newly installed as premier, announced after the National People’s Congress in March that China had no patience to endure a WTO dispute process that could take anywhere from two to five years to run its course.
China’s Ministry of Commerce then announced retaliatory tariffs of 20 per cent on all US exports to China. This hit growth-starved America right between the eyes. With $104bn of American-made goods sold in Chinese markets in 2011, China had become the US’s third-largest and its fastest-growing export market. To add insult to injury, China-dependent Walmart announced average price increases of 5 per cent. Other retailers followed suit. Talk of stagflation was in the air and hard pressed American consumers hunkered down further. US financial markets swooned. The stock market was hit by pressures on profit margins, growth and inflation. The bond market was also unnerved by the realisation that the Federal Reserve was seriously behind the curve. With good reason. After its meeting in June 2013, the Fed reaffirmed its ever-extending commitment to keep its benchmark policy rate near zero through 2015, and even dangled the possibility of yet another round of quantitative easing, QE4. Yields on 10-year Treasuries moved back above 4 per cent and stocks fell sharply further.
Feeling the heat from financial markets, Washington turned up the heat on China. Mr Romney called Congress back from its Independence Day holiday into a special session. By unanimous consent, Congress passed an amendment to DATA – upping the tariffs on China by another 10
At that point an indignant China turned to its own version of the big bazooka. The biggest foreign buyer of US debt was nowhere to be seen at the Treasury’s August 2013 auction. Long-term interest rates spiked and within weeks yields on 10-year Treasuries hit 7 per cent. The dollar plunged and the US stock market went into free fall. Just like that, the so-called exorbitant privilege of the haven asset vanished. When asked at a press conference why China would willingly
engage in actions that would undermine the value of more than $2tn in Treasuries and other dollar-based holdings, Zhou Xiaochuan, retiring governor of the People’s Bank of China, said: “This is not about risk-adjusted portfolio returns. We are defending our people against an act of economic war.”
By the autumn of 2013 there was little doubt of the severity of renewed recession in the US. Trade sanctions on China had backfired. Beleaguered American workers paid the highest price of all, as the unemployment rate shot back up above 10 per cent. A horrific policy blunder had confirmed that there was no bilateral fix for the multilateral trade imbalance of a savings-starved US economy.
In China, growth had slipped below the dreaded 6 per cent threshold and the new leadership was rolling out yet another investment stimulus for a still unbalanced and unstable Chinese economy. As the global economy slipped back into recession, the Great Crisis of 2008-09 suddenly looked like child’s play. Globalisation itself hung in the balance.
History warns us never to say never. We need only look at the legacy of US Senator Reed Smoot and Representative Willis Hawley, who sponsored the infamous Tariff Act of 1930 – America’s worst economic policy blunder. Bad dreams can – and have – become reality.
The writer is a senior fellow at Yale University and a former chairman of Morgan Stanley Asia. The article is based on an essay for Caixin online.
This compelling read was recommended by AIIA NSW President Colin Chapman.