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US economic exclusiveness should encourage Asian inclusiveness

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US President Donald Trump waves during joint statements with China's President Xi Jinping at the Great Hall of the People in Beijing, China, 9 November 2017 (Photo: Reuters/Thomas Peter).

In Brief

As globalisation fatigue sets in, the United States is turning to protectionism. The questions that now need to be asked are: what are the trends underlying this phenomenon? And how should Asia respond to it?

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The United States was a major crude oil exporter until the 1970s. When oil production declined, the United States became increasingly dependent on oil from the Middle East. In turn, the oil-producing countries invested their trade surplus in US Treasury securities over the coming decades.

Awash with the US dollar, the post-World War II Bretton Woods system became unsustainable by 1973 and led to the twin deficit during the Reagan administration in the 1980s. Still, the growth of financial markets backed by the US dollar continued to support expanding international trade and the world economy in the 1990s and 2000s.

The recycling of the US dollar has run its course, while major central banks have taken a series of monetary easing policies in response to the global financial crisis in 2008. The resulting low-interest rate environment and surging oil price encouraged investment in the US oil industry, leading to the US shale revolution in 2011 that is pushing US oil production above its 1970 levels.

The rise in US oil production could contribute to a reduction not only in the United States’ trade deficit but also in US Treasury issuance. The United States can now become self-sufficient in energy, reduce its debt issuance and revive its manufacturing industry.

In other words, taking a narrow view the United States needs less free trade and more protectionism. But free trade remains crucial for other countries, especially those that mainly export or import oil. This contradiction of benefits is contributing to the growing tension between the policies of the United States and its major trading partners.

But this tension is not necessarily a bad thing. US government debt burdens future generations and its reduction is a national mandate. At the same time, major foreign US Treasury securities holders such as China and Japan can reduce their holdings of these assets, which sometimes incur negative returns in their own currency terms.

These changes will create new challenges. First, the rise of US interest rates is likely to lead to a repatriation of the US dollars circulating the world and in turn to lower liquidity. In response, the world needs to reduce its dependency on the US dollar in trade and finance. Second, global supply chains need to adjust to the new US economy as it tries to revitalise its manufacturing industry. And third, most countries will see their exports to the United States decline as Washington enters trade wars.

These new challenges urge the world to adjust to a new form of international trade and a multi-currency regime. New wisdom and commitments are required to navigate the world economy in a new direction.

Asia needs to adjust to US protectionism by introducing appropriate and effective counter-measures. More specifically, Asia must rebuild international trade via the promotion of regional integration and reduce its dependency on the US dollar.

To promote regional integration, Asian countries need to harmonise regulations and standards in trading, banking and accounting to create larger markets. Free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) should be advanced to help Asia remain competitive in global value chains and to replace the United States as the global consumer market.

To reduce Asia’s US dollar dependency, a multi-currency clearing system must be introduced for energy trade and in particular for crude oil and liquefied natural gas. Currency and energy are the lifeblood of any economy. To strengthen the liquidity and effectiveness of such a multi-currency regime, off-shore markets based on the Japanese yen and the Chinese yuan should be further developed.

Stock exchanges in the region should also be deregulated so that foreign companies can raise capital by tapping into the excessive savings that corporate and household sectors have accumulated.

While the US military cuts back its involvement in the Middle East and potentially in Asia, these regions — and US allies within each region in particular — need to take up the responsibility of establishing a new security framework that does not rely solely on the United States. When the United States chooses to be ‘excluded’, the rest of the world should show leadership and create a new ‘inclusive’ world order.

Tomoo Kikuchi is Visiting Senior Fellow at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore. He was Senior Research Fellow at the Lee Kuan Yew School of Public Policy and Assistant Professor of Economics at the National University of Singapore.

Yohei Tanaka is Lead Economist and Deputy Manager at the America and Africa Project Division, INPEX, the Japan-based oil and gas exploration and production company.

A version of this article originally appeared here on RSIS.

One response to “US economic exclusiveness should encourage Asian inclusiveness”

  1. The USA can’t do protectionism due to the fact that it had sent its manufacturing industries overseas plus reducing the tariff barriers so American companies can bring their manufactured products into the country.

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