Beware Depending on Central Banks to Offset Trade Tension Costs

U.S. leadership in global trade and ensuring fair and open markets may be in question over the past two years. But when it comes to setting the tone in monetary policy, Washington clearly continues to be the indisputable leader. Amid much anticipation from financial markets, the U.S. Federal Reserve lowered interest rates for the first time in over a decade to stave off economic slowdown. Meanwhile, days before the Fed’s monetary easing, the Bank of Japan also made clear that it too stands ready to follow suit, whilst speculation is on the rise that the European Central Bank will be following the Fed’s direction by later next year. The Fed, in short, remains the trend-setter when it comes to international monetary policy, and the U.S. central bank clearly remains the leader in keeping a steady hand on the global economic engine. Yet the real danger may be that too much may be expected from central banks to offset much of the multitude of geopolitical risks and downward pressure for growth that have come as a result of uncertainties in global trade rules, especially when the prospect for even loosely coordinated monetary policy may not be as easy as it seems.

For one, there is the seeming gap in the political sphere in acknowledging the less than rosy outlook for the global economy and thus a lack of urgency in taking action to thwart downside risks. In assessing the current economic state of affairs, for instance, leaders of the Group of 20 in Osaka last month concluded that “global growth appears to be stabilizing, and is generally projected to pick up moderately later this year and into 2020,” even as they acknowledged the geopolitical risks, most notably the impact of ongoing trade tensions. Similarly, the Asian Development Bank in its updated assessment of regional growth in July kept its projections for 2019 and 2020 unchanged in spite of the unresolved trade dispute between China and the United States.

Yet to belittle the risks posed to growth by policies that choose to increase trade barriers would be foolhardy and cannot be offset by rate cuts alone.

Yet to belittle the risks posed to growth by policies that choose to increase trade barriers would be foolhardy and cannot be offset by rate cuts alone.  By now, the strains that ongoing trade tensions between Washington and Beijing would impose not only on both the United States and China, but across Asia and indeed the world, are apparent. At the same time, there is broad recognition that the White House is well aware of the pitfalls of sweeping change in trade dynamics and that its longer-term objective is to fundamentally shift trade patterns and push for an exodus of U.S. investments into China, as much as slashing Chinese exports to the United States. It would be a challenge for U.S. monetary easing alone to offset such seismic shifts, at least in the near-term.

Then there is the challenge of other central banks following suit. The Bank of Japan stated two days before the anticipated Fed rate cut that it would “not hesitate to take additional easing measures if there is a greater possibility that the momentum towards achieving the price stability target will be lost." Certainly, the yen’s appreciation against the dollar alone amid growing uncertainties about international trade has intensified speculation of the BOJ taking action to ensure that Japan’s economy remains steady, if not expanding. Still, Japanese economists by and large dismiss the effectiveness of a BOJ cut in stopping the yen for appreciating further, especially since the Fed has the ability to cut rates further, unlike the Japanese central bank.

Meanwhile, the geopolitical risks to growth in East Asia continue to grow...

Meanwhile, the geopolitical risks to growth in East Asia continue to grow, not least with worries about escalating tensions with Iran and the United States that could hurt the region’s energy security still further. Then there are the self-imposed geopolitical risks by Japan and South Korea, with nationalist sentiment on both sides taking over in driving bilateral relations rather than focusing on enhancing cooperation on shared economic interests, not to mention security concerns.

In short, the cautiously upbeat rhetoric about the global economy and expectations for sound monetary policy to carry over trade tensions as well as other geopolitical risks may need to be reassessed. What’s more, staking too much on a de facto coordinated monetary easing may be placing far too much expectations on a move that may actually be more difficult to move ahead than expected.

Follow Shihoko Goto, deputy director for geoeconomics and senior associate for Northeast Asia, on Twitter @GotoEastAsia.

The views expressed are the author's alone, and do not represent the views of the U.S. Government or the Wilson Center. Copyright 2019, Asia Program. All rights reserved.