Originally published in The Australian.
Trade wars, populism, and geopolitics. The world is quickly becoming more fraught as complex forces threaten to disrupt and reshape the global economy in profound ways. In this context, the Lowy Institute launched the Global Economic Futures project aimed at better understanding this rapidly changing global economic landscape, where it might take us, and the key choices to be made.
The project examines the future shape of the global economy especially given rising tensions between the world’s two largest economies – the United States and China – and the possible implications for, and changing roles of, major regional economies, including Australia, India, Indonesia and others.
Originally published in The Australian.
Despite a COVID-constrained global economy, rising unemployment and high government debt, meeting the fiscal challenge is within Australia's means
Joint submission by Lowy Institute researchers to the JSCFADT inquiry into the implications of the pandemic.
At a time when stability and predictability are needed most, the body at the heart of the rules-based trading system — the World Trade Organization — is reeling from far more than just a paralysed Appellate Body and antagonistic Trump administration.
Stephen Grenville gives a detailed account in the Eureka Report on Modern Monetary Theory (MMT), which after a decade on on the periphery of economic discussion, has recently surged in popularity.
In this episode of COVIDcast, Roland Rajah, Lowy Institute lead economist, sat down with Pascal Lamy to discuss the future of globalisation. Lamy has served at the peak of global trade and economic governance. He was the Director-General of the World Trade Organization for 8 years, from 2005 to 2013, before which he was the Trade Commissioner for the European Union (EU) from 1999 to 2004. Currently he is President emeritus of the Jacques Delors Institute, a policy think tank in Paris.
Covid-19 has delivered a huge shock to globalisation. Borders have been literally shut, international supply chains have been severely disrupted, and governments around the world have stepped in with a range of emergency measures that, while necessary to fight the crisis, have also created an unlevel playing field across countries. Protectionist measures and sentiments seem to be rising very rapidly. Almost all political leaders want to talk about reshoring manufacturing, and certainly very few want to talk about how keeping their own markets open is critical to economic recovery.
All of this has come on top of pre-existing challenges to globalisation – not least the trade war between the US and China, Western concerns about China’s party-state economic model, and an arguably existential crisis facing the World Trade Organization (WTO).
Lamy argues the EU will likely push Australia hard on its climate-change and environmental policies – which is now a key European conditionality for all trade agreements.
Lamy puts forward a bleak picture for the future of globalisation. In addition to the host of well-known problems, he argues that what he terms “precautionism” could form a new and pernicious barrier to globalisation. This would see governments looking to de-risk their economies – e.g., to ensure the security of key supply chains – in ways that could prove extremely difficult to reconcile across countries to create a level international playing field.
The WTO needs to modernise. The WTO disciplines need to more effectively cover China’s state-based system, particularly through implementing the idea of competitive neutrality. But the geopolitical rivalry between the US and China is here to stay. The WTO will need to switch from focusing on “convergence”, towards market-based economics, and to “coexistence”. In the immediate term, a “cooling down” period for WTO over the next one to two years following Covid-19, with a coalition of the willing agreeing to wind down extraordinary measures and returning to the WTO negotiating table. Developing countries have the most at stake in keeping the global economy open and seeing recent extraordinary moves in rich countries to prop up industries ultimately removed.
Finally, turning to negotiations for a new free trade agreement between Australia and the EU, Lamy argues the EU will likely push Australia hard on its climate-change and environmental policies – which is now a key European conditionality for all trade agreements.
COVIDcast is a podcast hosted by Lowy Institute experts to discuss the implications of Covid-19 for Australia, the Asia-Pacific region and the world. Previous episodes are available on the Lowy Institute website. To stay up to date with the latest episodes of COVIDcast, subscribe to Lowy Institute Audio on Apple Podcasts, Google podcasts, Spotify or SoundCloud.
In this episode of COVIDcast, Lowy Institute lead economist Roland Rajah sat down with Adam Tooze to discuss how the Covid-19 economic crisis is evolving and reshaping the world economy. Tooze is Professor of History at Columbia University and the Director of its European Institute. He is also the author of the 2018 book Crashed which is widely acclaimed as one of the best books about the 2008 global financial crisis and its aftermath.
Rajah and Tooze discussed how the story of Covid-19 has rapidly evolved as the crisis has unfolded. Tooze noted how China had gone from facing what many serious people thought could be its Chernobyl moment to getting control of the virus. Similarly, Europe was initially badly hit but has more recently the outlook has improved. Meanwhile, the United States has been on a rollercoaster, with initial fumbles on its health response followed by a massive fiscal and monetary response that has since begun to unravel in partisanship even as social unrest has exploded onto its cities’ streets.
The pair also discussed the importance of a proposed €750 billion European Union Covid recovery fund. Rajah noted that the level of fiscal support is perhaps not as large as the headline figure might suggest but that it was still substantial and could be scaled up in future. Tooze agreed, arguing that it was certainly big enough to qualify as a really serious political step, particularly on the part of Germany. However he also noted that serious blockages remained and the new proposal was far from a done deal.
The conversation then returned to China, focused on the contrast between China currently being a pillar of relative strength in the global economy but with relations with the West souring on nearly every front. Tooze noted that China had clearly chosen this time to “push” and that the West is going to face difficult choices. But cooperation with China also remained essential, especially on climate change. He noted that Europe has the most constructive policy of moving towards a green transition and see China as a potential partner. Tooze concluded by arguing there was enough there for cooperation, even though there is little sympathy between the two at a political level.
COVIDcast is a weekly pop-up podcast hosted by Lowy Institute experts to discuss the implications of Covid-19 for Australia, the Asia-Pacific region, and the world. Previous episodes are available on the Lowy Institute website. You can also subscribe to COVIDcast on Apple Podcasts, listen on SoundCloud, Spotify, Google podcasts, or wherever you get your podcasts.
In Episode 12 of COVIDcast, Roland Rajah, Director of the International Economy Program, sat down with Brad Setser, Senior Fellow for International Economics, Council on Foreign Relations, to discuss the upheaval brought about by the pandemic in emerging economies and what this has revealed about the importance of the US dollar in the functioning of the global economy.
Rajah and Setser began by discussing the dramatic outflow of capital from emerging markets between March and April. Setser described this as “the most rapid withdrawal of foreign financing that anyone had seen since the global financial crisis”. Although markets have since stabilised largely due to the intervention of the Federal Reserve (the Fed), a number of economies remain very fragile. As Setser put it:
“So long as oil prices remain low, or tourism remains shutdown, or if you needed foreign financing to roll over your debt, foreign financing remains scarce … Even though the most important shock and the peak of market stress is past, some countries are living off buffers and borrowed time.”
Setser also noted that while the Fed had reacted creatively and forcefully, the International Monetary Fund had been left on the sidelines and had yet to offer a crisis facility that is attractive to the big emerging markets.
On the role of the US dollar as global reserve currency, Rajah questioned the ability of emerging markets to wean themselves off dollar dependence. Setser argued the US dollar remains the most used to denominate world trade and financial assets – “as long as that’s the case, in a crisis you’re going to need dollars”.
Despite China’s goal to establish the RMB as a global reserve, the crisis and the response of the Fed, including providing dollar swap lines, had reinforced the dominance of the US dollar.
The US dollar remains the most used to denominate world trade and financial assets – “as long as that’s the case, in a crisis you’re going to need dollars”.
Given this dominance, Rajah asked why the United States did not actively take advantage of the dollar as a powerful tool of attraction in its competition for influence with China, and whether it had been too selective in the countries to which it offered swap lines. Setser said “the Fed’s mandate doesn’t include providing political swap lines to gain political influence” yet also that “the United States hasn’t made full use of its financial power”. America could try to compete with China to provide financing for infrastructure as well as financing in times of crisis through the Treasury’s balance sheet, he said.
Rajah concluded by asking what emerging economies could and should do to get through the current crisis. He noted everyone needs to run large fiscal deficits, but, in the absence of outside help, emerging economies are turning to their own central banks in unconventional ways reminiscent of quantitative easing in advanced economies. Setser argued it was a balance of risks versus benefits, and that each country has a choice to make, “between a weaker currency and easier access to central bank financing for fiscal deficits”.
COVIDcast is a weekly pop-up podcast hosted by Lowy Institute experts to discuss the implications of Covid-19 for Australia, the Asia-Pacific region, and the world. Previous episodes are available on the Lowy Institute website. You can also subscribe to COVIDcast on Apple Podcasts, listen on SoundCloud, Spotify, Google podcasts or wherever you get your podcasts.