Free trade framework must be reinforced: The Yomiuri Shimbun

People hold signs as they demonstrate against the Trans-Pacific Partnership (TPP) trade agreement in Washington, DC, on Nov 14, 2016.
People hold signs as they demonstrate against the Trans-Pacific Partnership (TPP) trade agreement in Washington, DC, on Nov 14, 2016.PHOTO: AFP

In its editorial on Jan 4, The Yomiuri Shimbun discusses the potential impact of US President-elect Donald Trump's policies on the economy in 2017

Industrialised countries stand at a crossroads over whether they can start recovering from a protracted period of stagnation. Viewed as a key to this is for them to contain the rise of protectionism and solidify the free trade system.

The biggest point to be noted is the policy management of U.S. President-elect Donald Trump. Will aggressive public spending bring about a virtuous cycle for the U.S. economy? Will he increase his leaning toward a trade policy of anti-globalism? The course of action he takes will greatly affect the world economy in 2017.

Following the election of Trump as the next U.S. president, the Organisation for Economic Cooperation and Development (OECD) revised up its projection of the world gross domestic product by 0.1 percentage points to 3.3 per cent in 2017.

Trump has promised to spend US$one trillion (S$1.44 trillion) on renewing bridges and roads over a period of 10 years, while at one stroke lowering the corporate tax rate from 35 per cent down to 15 per cent. The OECD concluded that the possible effect of these sizable U.S. investments in its economy would spread to other economies.

Expectations have also risen in the financial markets, causing a surge in prices on the Japanese and U.S. stock markets. Meanwhile, anticipation of higher U.S. interest rates drove investors to buy the dollar, sending the value of the dollar up and that of the yen down sharply.

The U.S. economy has recovered ahead of other industrialised countries, but there will be some rough going for its sustained growth in the days ahead.

The U.S. Federal Reserve Board has forecast that there could be three interest rate hikes in 2017, as it anticipates that prices are highly likely to rise due to aggressive fiscal spending by the incoming administration.

Should the pace of interest rate hikes accelerate, the overall economy will cool down. There are also aspects of the advance in the dollar on currency markets - against the backdrop of the rise in interest rates - that undermine the international competitiveness of export-oriented industries in the United States.

There are also many causes for concern on the trade front.

Trump attaches importance to the recovery of jobs among U.S. manufacturers. From his standpoint of pursuing an "America first" policy, his administration is expected to come up with such protectionist policies as import restrictions.

It is highly likely that his trade policy will be, for the time being, targeted at China, a country with which the United States has a conspicuously large trade deficit.

Trump has picked Peter Navarro, an economist known for his hard-line stance against China, as assistant to the president to lead the National Trade Council to be newly established.

If bilateral friction intensifies between the United States and China - the two leading economic powers - their trade will shrink, having a tremendous impact on the world economy.

Aggressive investment by China's steel industry in the wake of Lehman Brothers' collapse has backfired. Its excessive steel production has made global markets sluggish, provoking protectionism in the steel industry.

More than half of China's steel firms are said to be so-called "zombie companies," which have effectively collapsed. It is also estimated that non-performing loans at Chinese banks are 10 times as high as officially released estimates.

For its part, China must work swiftly to resolve its overproduction and other structural problems.

The Trans-Pacific Partnership (TPP), a free trade pact that has been agreed upon after about five years of arduous negotiations, is in a state of crisis. Trump has said he will withdraw the United States from the TPP deal.

Even under a situation in which effectuation of the pact is difficult, it is necessary to steadily advance other free trade frameworks.

If the TPP treaty goes adrift, the Regional Comprehensive Economic Partnership (RCEP) - an envisaged scheme involving 16 nations, including Japan, China, South Korea and India - will make its presence felt more strongly. In RCEP negotiations, China is said to be passive about laying down advanced investment rules. The TPP deal, which has created a high-level trade and investment mechanism, must be used as a model in this respect.

Japan and the European Union are currently negotiating over an economic partnership agreement, and the EPA pact is also significant. The move can be expected to create a new economic bloc while also serving as a check intended to keep the United States tied to the free trade system.

The remaining issues in the Japan-EU talks include tariffs on Japanese car imports and the opening up of Japan's agricultural products market.

In light of a succession of national elections to be held in Europe this spring and beyond, efforts should be made to seek a broad agreement on that EPA pact at an early date.

The European economy is continuing to moderately recover. Although there was widespread shock immediately after Britain's decision in a national referendum last June to exit the EU, the resulting turmoil has died down.

It must be noted, however, that the upward trend in the European economy has been largely supported by the European Central Bank's extremely easy-money policy.

If Britain's planned EU exit begins to take a specific form, it could put the EU economy at risk of renewed confusion. In Italy, a financial crisis facing the banking industry has led to a situation that could spark financial uncertainty in that nation.

As a major economic power, Germany should strive to expand domestic demand through fiscal stimulus and other measures, thereby contributing to stability in the European economy.

Until the end of last year, major markets around the world were bustling with high stock prices. It was hoped that the situation would cause a resurgence of oil money due to a pick-up in the market prices for crude oil, combined with what is called "Trump rally."

Last year, the Organisation of Petroleum Exporting Countries (Opec) and non-Opec nations, including Russia, reached their first agreement in 15 years to jointly reduce output.

It will benefit the entire world to abide by the cutback quota assigned to each nation and work to stabilise crude oil prices.

This year, such emerging economies as Brazil and Mexico will likely be tested by interest rate increases by the U.S. Federal Reserve Board.

The money that flowed into emerging countries from advanced nations due to monetary relaxation is beginning a backflow to the United States, where interest rates are high. Emerging nations must be fully prepared for inflation and other problems that could be triggered by a sharp drop in their currency values.

The Yomiuri Shimbun is a member of The Straits Times media partner Asia News Network, an alliance of 22 news media entities.