Reference News Network reported on May 12 that the Financial Times website published an article titled "The Old Global Economic Order is Dead" on May 6. The author of the article is Martin Wolf, the chief economic commentator of the newspaper. The full text is excerpted as follows:

What should outsiders think about the outcome of the China-US trade war?

To understand the problems facing the world economy, we can start with the topic of "global imbalance". This topic was widely discussed before the global and eurozone financial crises from 2007 to 2015. In the years after that, these imbalances have narrowed somewhat, but the overall situation has not changed. As the latest "World Economic Outlook Report" by the International Monetary Fund points out: China and European creditor countries (especially Germany) have persistent surpluses, while the United States has corresponding deficits. The United States has a trade and current account deficit, enjoys a comparative advantage in services, and suffers a huge deficit in manufacturing.

What questions would fervent free marketeers raise? In fact, even a less fervent free marketeer might have ample reason to point out that the United States has been living beyond its means for decades.

However, at least three major flaws can be seen from this view that global imbalances are large and persistent.

First, global imbalances are politically harmful - in fact, so harmful that they helped Trump get elected president twice.

Second, there are "negative-sum" intervention behaviors in surplus areas aimed at changing the balance of global economic power. Although international relations are not only about economic strength, economic strength is undoubtedly a crucial part of it.

Finally, domestic borrowing often corresponds to unsustainable external deficits. Added to financial fragility, domestic borrowing can lead to massive financial crises. Foreigners have maintained a substantial savings surplus with the United States over the past few decades. Since the beginning of this century, U.S. businesses have been in balance or surplus, and U.S. households have been in surplus since 2008. Due to the fact that the balance sheets of these sectors must always sum to zero, domestic deficits corresponding to the U.S. current account deficit have been long-term fiscal deficits.

If real interest rates had remained high, fiscal deficits might have led to long-term external deficits. But the opposite is true: real interest rates are either low or very low. Keynes' assumption appears correct: net foreign savings inflows shown by capital account surpluses (and current account deficits) make large fiscal deficits necessary; otherwise, domestic demand in the United States would remain persistently insufficient.

China is not the only participant on the other side of the global ledger, but it is the most important one. It is inevitable that existing industrial powers fear the rise of Made-in-China.

Who will win the China-US trade war? I believe China will win, partly because the United States has made itself so untrustworthy, and partly because China can choose to expand domestic demand to offset the impact of losing American demand. Columnist Matthew Klein wrote that China has had this option for a long time but did not implement it. My response is that China must now implement it and genuinely choose to expand domestic demand.

The consequences of the China-US trade war and the possible evolution of Trump's tariffs are pressing issues. But never overlook the broader issues that need to be considered. Trade policy should not be judged in isolation. As those who established the post-war trading system (particularly Keynes himself) knew, the success of the post-war trading system also depends on global macroeconomic adjustments and how the international monetary system operates.

In the first phase after World War II, the United States had a huge current account surplus, which it used for lending. In the second phase, before 1971, the U.S. surplus gradually decreased. This led to the end of the fixed exchange rate system for the dollar, and the widespread adoption of floating exchange rates and inflation targeting, at least in high-income countries. That system worked well before China's rapid rise. The role of the United States as the ultimate lender and consumer giant was tested by Japan and Germany in the 1980s and became politically and economically unfeasible.

The old economic order dominated by the United States is no longer sustainable. The United States will no longer act as the final balancer. The world - especially China and Europe - must rethink this. (Translated by Ma Dan)

Original source: https://www.toutiao.com/article/7503396521275900431/

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