August 8, 2019 — I responded to 9 questions in an interview today with Chosun Ilbo. They concern the US-China trade war and the new simultaneous dispute between Korea and Japan.
- The trade war between the world’s two largest economies continues and it appears the war is spilling over to currency now. What do you think are the fundamental reasons for this conflict?
JF It was legitimate for the outside world to ask China to make some changes. But we did not sit down in a responsible manner with China’s leaders to negotiate. The reason for the trade war is that an ignorant and reckless man by chance became president of the United States. He has aggressively raised tariffs against China as well as other trading partners. He has departed from past international commitments, from good economic policy and even from basic deal-making tactics.
- Some experts worry the trade war could damage global economy so badly that it could be a ‘perfect storm’ to the global economy. Do you agree with this notion? How do you expect the trade war affect the global economy?
JF The trade war has already had a negative effect on the world economy, which is likely to get worse. But there are always multiple factors at play in determining world growth.
- Which one between U.S and China would be damaged worse from the trade war?
JF Both will be damaged by a trade war, but China will be damaged more.
- How and when do you expect the trade war conclude?
JF It is unlikely that China will back down. Will Trump back down, as evidence accumulates of the economic damage sustained by American consumers, workers, farmers, and firms? Although his popularity ratings are low, they do not seem to be getting any worse. Possibly a big decline in the stock market could “take some of the wind out of Trump’s sails,” leading to some face-saving compromise. More likely, we will have to muddle through until he leaves the White House.
- Do you think there’s any possibility U.S and China reach another ‘Plaza Accord’ like Japan did in 1980’s?
JF No. There are three big differences between the current situation and the Plaza Accord.
(1) In 1985, the dollar was overvalued in the sense that the final stages of its appreciation could not be explained by economic fundamentals. Thus the conditions were ripe for government action to be effective in bringing it down. The recent appreciation of the dollar, by contrast, in the natural result of the US budget deficit, the rest of the world’s readiness to finance it, and Trump’s tariffs. (2) The Plaza Accord was made possible because Japan and other G-7 allies saw it as in their interest to cooperate with the US. (3) In 1985 the Reagan Administration and the other G-7 governments shared the goal of heading off protectionist pressure in the US congress. When Donald Trump pushes for a weaker dollar, his motive is to facilitate protectionism, not to prevent it.
- What do you think is the biggest risk factor to the global economy?
JF The second half of the 20th century was a period of relative peace, progress and prosperity without precedent. The foundation was a set of multilateral agreements, rules, norms, and institutions that promoted, for example, free trade and the rule of law. The biggest risk factor to the global economy is that, taking the blessings of that system for granted, we might heedlessly dismantle it.
- Central banks around the world including the Fed are lowering their benchmark interest rate. Do you think new era of ‘easy money’ is coming?
JF Markets and commentators see a new trend toward easier money, in response to slower growth in the US, Europe, China and other countries. But these predictions may be overdone. I would not necessarily forecast a big further easing of monetary policy in the coming year.
- Japan excluded South Korea from ‘preferred trading partner list’ last Friday. Who do you think is more responsible for this situation, South Korea or Japan?
JF I don’t see why Japan has taken such aggressive trade actions against South Korea. Of course there is a long history leading up to the current situation, and it is hard for an outsider to jump in and judge. Also I would put some blame on the US President for abdicating the leadership that has previously held the 3-country alliance together and for setting a bad example with his own aggressive trade policies.
- Any advice for the Korean and Japanese governments to fix this problem?
JF At this time in Asia/Pacific relations, it is especially necessary that Korea and Japan get along. The risks posed by the US-China rift, a nuclear North Korea, and a trouble-maker in Russia are huge. Korea understandably has old historical grievances against Japan. But they must not be allowed to get in the way of attempts to deal with today’s urgent and tremendously consequential issues.