A time for world economic leadership

Now that the election is behind us, one has to hope that the incoming administration will not abandon the United States’ historic role in providing leadership to the world economy. Since, without that economic leadership, there is the real risk that in today’s troubled global economy, the protectionist forces that are all too much in evidence around the globe will gather strength in a manner that could undermine world economic prosperity.

There are many reasons to think that the international economy will demand considerable attention in the first year of the next US administration. After many years of highly unorthodox monetary policy across the globe, the world economy is drowning in debt and global financial markets are characterized by the serious mispricing of risk. Meanwhile, bank balance sheets especially in Europe have been impacted by years of relatively poor economic performance, and trade protectionism is becoming pervasive around the world.

Adding to the world economy’s woes is the wave of political populism that is sweeping across Europe in general and in countries like France, Italy, and the Netherlands in particular.  Meanwhile, deep fault lines are becoming all too apparent in key parts of the global economy. Those fault lines include a marked slowing in Chinese economic growth as that country tries to deflate its credit bubble, a European economy that is still struggling with its sovereign debt crisis, serious economic difficulties in commodity dependent emerging market economies like Brazil and Russia, and a Japanese economy that is again mired in deflation.

Countries have been increasingly trying to cope with this difficult international economic conjuncture by resorting to restrictive trade policies and by having their central banks print money in an effort to cheapen their currencies for competitive advantage. Without economic coordination and economic leadership, the world economy risks going further down the path of currency wars and beggar-thy-neighbor policies which has in the past proved to be so destructive to global prosperity.

It is against this background that one has to regret that far from offering the world economic leadership, as has come to be expected from the world’s largest economy, the United States appears to be headed in the direction of fueling the movement towards beggar-thy-neighbor policies. This was all too apparent in the anti-globalization tone of the election campaign and in the specific international economic proposals offered by President-elect Donald Trump. Those proposals included the imposition of punitive import tariffs on countries like China and Mexico, the tearing up of multilateral and bilateral trade agreements, and confrontation with countries running large bilateral trade surpluses with the United States.

Hopefully, when Donald Trump assumes office, he will find a way to offer international economic leadership and to back down from the confrontational stance he adopted during the campaign towards the country’s main trade partners. If he does not do so, we should brace ourselves for some very rough sledding in the global economy in the years immediately ahead.

Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.