Divergences Rise in Macro-Policy on trade battle

With the recent cut to banks' reserve requirement ratio, China seems to have de-pegged its monetary policy from that of the US. Central banks of the two countries are now giving more emphasis to their policy independence instead of coordination.

This development may increase uncertainty in global markets and arouse concern that the escalating trade war between China and the US is also becoming a "currency war."

In the multilateral arena, uncertainties are also on the rise as there have been increasing divergences and deteriorating conditions in macroeconomic policy.

In early October, the B20 Summit 2018 ended with discord in the Argentine capital of Buenos Aires. On behalf of Chinese business circles, the China Council for the Promotion of International Trade and the B20 China Business Council opposed the report of the policy proposal from the summit, saying that the report ignored the proper demands and concerns of Chinese businesses by singling out topics such as State-owned enterprises distortion of market competition.

The councils said in a statement that the report failed to represent the actual discussions and policy recommendations of the business community, running counter to the B20 Summit's consensus principle. They urged the B20 Summit to account for Chinese companies' proposals and make substantive changes to the policy recommendation.

This is another conflict that occurred in the G20 after the Trump administration rejected the anti-protectionist pledge in a draft communiqué at a meeting of G20 finance ministers in March 2017. Differences between China and the US are affecting the progress of the G20 summit this year. The topic proposal of "State-owned enterprises distorting market competition" has clearly extended the bilateral trade conflict between China and the US to the multilateral level.

Even in the G7 - consisting of Western countries - the multilateral coordination of macroeconomic policy has become difficult. At the G7 summit held in Canada in June, US President Donald Trump surprisingly instructed US representatives "not to endorse the communiqué."

What happened in the G7 and G20 indicates major changes in global economic governance. Since Germany assumed the G20 presidency in 2017, the G20 has entered a new stage. Due to domestic political changes in many G20 member states, there has been a rise of populism and nationalism, with opposition to globalization that is making multilateral coordination difficult.

The Trump administration is mainly focused on key trade agreements rather than multilateral forums like the G7 and G20. On September 30, the US and Canada finally concluded negotiations to revise the North American Free Trade Agreement (NAFTA), which will now be called the United States-Mexico-Canada Agreement (USMCA).

The three-country agreement is an important part of the Trump administration's global strategy for dealing with China. According to a section titled "Non-Market FTA" in the USMCA, "Entry by any party into a free trade agreement with a non-market country, shall allow the other parties to terminate this Agreement on six-month notice and replace this Agreement with an agreement as between them (bilateral agreement)."

It also stipulates that a non-market country is one that "at least one party has determined to be a non-market economy for purposes of its trade remedy laws and is a country with which no party has a free trade agreement." This has been described as a "poison pill" provision.

It is known that the US and the EU haven't recognized China's "market economy status" in the WTO and other global economic governance systems. Thus, with the USMCA, it will be difficult for Canada and Mexico to conduct free trade agreement negotiations with China. If the US replicates the "poison pill" provision in future deals with the EU and other parties, China will face an unfavorable trade environment.

The biggest difference between the USMCA and the original NAFTA is that the influence of the new pact is now not just within the North American region, but it is starting to exert an impact on China's trade relations with the world. It seems that the Trump administration is attempting to rebuild the global economic order, which will be very hostile to China.

In addition, given their difficult economic situations, Latin American countries like Mexico are seeking support from China under the Belt and Road initiative (BRI). Yet, the USMCA will likely limit Mexico's participation in the BRI to a certain extent.

Other major economies like the EU and Japan haven't yet made any comment on the "poison pill" provision. But it is no secret that neither party has yet recognized China's market economy status in the WTO. It remains to be seen how this year's G20 meeting will react toward the USMCA and the US-centered world economic order.

(출처: 중국차하얼학회(察哈尔学会) 2018.10.31)