American economist Joseph Stiglitz, who won the Nobel Prize for economics in 2001, served as chairman of the Clinton administration’s Council of Economic Advisers. He is a professor at Columbia University and a former chief economist at the World Bank.
Stiglitz spoke to the SCMP about the US-China trade war, the economic ramifications of next month’s presidential election in the United States and the future of globalisation.
The US Federal Reserve announced a half a percentage point rate cut last month, the first in more than four years. What is your view of the US’ economic situation right now and what do Fed rate cuts mean for the US economy and the world?
I thought that the Fed increased interest rates too far and too fast, because it made a fundamental error of judgment that the inflation we were experiencing was due to excess demand but, in fact, it was a result of the shock of the Covid-19 pandemic and the war in Ukraine. I thought that the higher interest rates might actually worsen the problems, not improve them.
So, for instance, if we have supply side interruptions, you want to make investments to alleviate them, and the higher interest rates make those investments more difficult. A significant contributor to inflation has been the price of housing, and raising interest rates exacerbates the shortage of housing. So it was exactly the wrong medicine. It was a medicine that hurt the economy. So I am very pleased that they’re lowering interest rates, and I think it will be good for the economy.
I think the US economy has been very robust. The data says it’s slowing, so the rate cut was a little late. I think they have made a double mistake in that sense, because I didn’t think they should have increased it as much or as fast. I think their rates should have been lower, and we will pay a price for their mistake. I don’t think it’s going to be too high of a price, it’s just that I think they should have cut it earlier.
Let’s talk about the impact of the US presidential election. What are the respective prospects for the US economy when either Donald Trump or Kamala Harris wins the November election?
I think it’s unambiguous that Harris will be much, much better for the economy than Trump. I think Trump’s policy will result in higher inflation and a weaker GDP and more inequality and poorer health. Just to go over them very quickly, the higher inflation is going to be a result of his extremely high increases in the tariffs on China, which particularly hurt ordinary Americans with increased prices of apparel and appliances and so forth.
Harris may increase the tariffs, but it will be much more moderate. [Trump’s] threat to reduce or eliminate the independence of the Fed will create more uncertainty, which will weaken the economy. The higher inflation will result in the Fed raising interest rates wrongly, but they will do it anyway ... and that will weaken the economy. The tax cuts for the rich, if he gets them, won’t stimulate the economy much, but will create more inequality. And of course, if he has his way, he’ll eliminate Obamacare, which will worsen the health status of ordinary Americans. So in every dimension, he’s a danger to our economy.
What will the outcome of the US presidential election mean for trade and economic ties with China?
I think, quite frankly, both [candidates] are pushing for weaker economic ties, but I think the difference is that Harris will be de-risking, making the US less dependent on China, and in particular making the West, more generally, less dependent on China in certain areas of technology.
Whereas Trump has a mistaken zero-sum view of the world, and he has no sense of the capacity of economies to adjust. So raising tariffs very rapidly will be a major distortion to the economy, a major disturbance to the economy, both in China and the US, but more in the US, which we will have a hard time adjusting. Tariffs of 10 per cent is one thing, 50 or 60 per cent is another.
Apart from China, how do you see the outcome of the election playing out when it comes to the US’ economic ties and cooperation with other countries?
The Harris administration will believe in multilateralism, and will be engaged very strongly with promoting good relations with most economies around the world. Not with Russia, obviously, and we’ve already talked about China, but with most other countries a Harris administration will be working very hard to improve relations. There’s often a tension in a country like the US, where money has such an influence in our political system, so that special interests prevail over the national interest. So, for instance, the US has not, I think, pushed for global policies with respect to intellectual property or multinational taxation that would be supported by most countries in the world. So that is going to be a problem. It has been a problem in the Biden administration.
Some people argue that the Biden administration turned out to be not so different from the Trump one when it came to policies on China. What is your view?
Well, I think the distinction, as I said before, is that the US wants de-risking and the current administration does not see the world in the same zero-sum way. But it has been, you might say, equally strong, aggressive, in certain areas where they have contended that China has unfairly subsidised, areas which are of particular importance, like electric vehicles (EVs) and solar panels.
There is a big debate in the US. There are two arguments going on. One is the allegation that China’s advantage in EVs and solar panels is because of government subsidies. Many people believe that is not true. The advantage China has in EVs is a result of a process that began 25 years ago of moving in that direction, the larger EV market in China, and the commitment of so much more resources. So it is not that it has been subsidised, but that there has just been more momentum in China.
The second is that even if China subsidised solar panels, the need for a green transition is more important than the need to create solar panel jobs, and that we should accept a gift from China of cheap solar panels, because it is very important for the rapid green transition. So my own view is very much that we need to have the capacity to produce both EVs and solar panels, but that the imperative of making a green transition rapidly means that we should not exclude cheap EVs and solar panels from our market, and we should find other ways of developing our capacity.
What I think is, we really are behind in addressing climate change, and so it is really important to use every cheap thing we can, including cheap EVs and cheap solar panels, to make the green transition. But we have to also have our capacity. That is the point of de-risking. We have to have our production capacity.
So my view would be, we accept the cheap goods from China and subsidise, if necessary, the production of solar panels and EVs to develop the capacity ourselves. Maybe China will continue being the cheapest producer. We will just have to develop our own capacities, in case something happens.
The US-China trade war has entered its seventh year. Did you expect it to last this long when it started in 2018?
When it started, I thought of it as mostly a Trump phenomenon, but to be frank, I did hear rumblings from the national security people and bipartisan concerns about excessive exposure to China and that we needed to de-risk. So I think I did [expect it to last]. And one more thing. Trump politicised relations with China in a way that would make it difficult for a Democratic administration to alter the course too much.
What I mean is, you never know the direction of politics, but Trump has, I think, falsely sold the notion that America’s political economic problems were due to China. There was evidence that the rapid increase of imports from China after the accession of China to the [World Trade Organization] did have a very negative effect on the American economy. There is evidence that those places in the country where there was a surge of imports have lower wages, more unemployment and lower property values. So that view is pretty well established now.
The question is, do you blame China, or do you blame the US government for not having provided education and help for adjustment to that? We said globalisation was good, but rapid globalisation was a shock. And we didn’t help the people who were hurt by the shock to adjust. It is always much easier to blame others than to accept your responsibility for not having done what you could have done to help adjust to the changing global economic situation.
While the trade war has certainly lasted beyond Trump and does not have a clear end in sight, what do you expect down the road?
I have three strategic concerns. If we were engaged in a new cold war, including a strategic trade war, I am disappointed that we have not managed our global policies better.
The first is we imposed restrictions on sales to China, for instance, of the very nano chips, the most advanced semiconductors. That only motivated China to work faster to develop its own capacity. So I think we were a little bit myopic in not understanding that that was actually helping China. We had a short-term advantage. But by imposing those sanctions, we are actually encouraging China to develop its own capacity faster.
The second thing is, we passed a very important bill, the Chips and Science Act in 2022.
But at least from my discussions with several people in the industry, and at least in Europe, their view is that as big as that bill was, it was not going to really be able to develop America’s capacity to make chips on its own, at least to the extent necessary for adequate de-risking. So it is naive thinking that we could, in this way, very rapidly increase our own competence in this area.
And the third is if you were waging a new cold war, I would have put more emphasis on winning the hearts and minds of those in the rest of the world, in the emerging markets and developing countries. And I think what we have done there has been a disaster. Just to name a few issues: vaccine apartheid, the position that we have taken in multinational taxation and many arenas where we’ve not been as helpful in the debt crisis. So I think overall, we have failed to win the hearts and minds of the people in the Third World. And you see that in some of the votes at the United Nations.
The US government has said these tariffs will benefit and protect the US economy, do you share that view?
I think I would say it has benefited, but I think we paid a cost, a price, for it. But I think we made a mistake, beginning in 1980 with then-president Ronald Reagan, in weakening our industrial capacity too far, and [the tariffs] are beginning to restore our industrial capacity.
Economic protectionism appears to have re-emerged around the world. A recent example would be Canada announcing the imposition of 100 per cent tariffs on Chinese EVs on August 26. What do you think the impact of this trend has been, and do you see an end to it?
I think yes, there will be an end to it. I think we’re not going to go to autarky. I think [economic protectionism] has remained very selective so far. I think we may wind up moving towards more regional trade groups, and also political trade groups.
I could easily see a weakening of trade between China and the West, but a strengthening of trade between the West and other countries in the emerging markets.
That is what you would expect, because part of the basis of trade is differences in costs, like the cost of labour. And still with the US, we will want to import goods produced where labour is less expensive.
But one of the things that the data has showed so far is that it seems as if China is exporting a lot of goods to countries in Southeast Asia, and those countries are exporting them to the US. So there is indeed a change in the overall patterns of trade, but I am not sure that there is a significant reduction in overall trade, so that we’re not moving into autarky, with every country on its own.
You mentioned there will be a rise in regional and political trade groups. Can you give some examples of how you’ve seen this already happening?
I think this is true. I have not looked at the data that closely, but for example, there has been an increase in trade between the US and Mexico. And I think if China manages its politics correctly, there could be an increase in trade within Asia.
One of the problems is that, for a reason that I don’t fully understand, China has been very aggressive in the South China Sea, and that of course is alienating, is a source of concern, for all the countries in the region, and that may be counterproductive for China’s economic relations with those countries. So for very little benefit in security, China seems to be risking its very deep economic integration with the countries in the region. I don’t understand why they are doing it.
Global supply chains appear to be undergoing a shift, with countries such as Vietnam, India and Mexico seemingly becoming increasingly attractive manufacturing hubs in comparison to China. What has been the impact of this?
I have not studied that closely enough to really make a judgment now, but one of the important things I would emphasise here is that the pandemic showed that our supply chains were not very resilient, and so there is going to be a lot of re-examination of our supply chains in order to make sure that they’re more resilient. And that means, to some extent, having our supply chains closer to home, but also a move away from just-in-time for inventory [management] and other practices that made our supply chains insufficiently resilient.
Has the world come to the end of globalisation?
Some people describe the era before 2008 as the era of “hyper-globalisation”. I think that era is over. And actually, in some of the financial flows, you see a decrease, even beginning with the global financial crisis of 2008. I think Trump and the new cold war have accelerated that. But as I said before, it’s not the end of the era of globalisation. It’s the end of “hyper-globalisation”, and it is a restructuring of the patterns of globalisation.
With trade relations changing, do you think there is hope that economic protectionism can be overcome and will countries be able to find ways to cooperate again?
I think there will be lots of cooperation, as I mentioned before, in regional groups and politically aligned groups. I think tensions will remain, but I hope that there will be a lot of cooperation in many areas as well. We need to cooperate on the area of climate change. And so the need for cooperation on climate change may itself motivate more cooperation in trade.
One thing I could imagine is countries signing on to narrower trade agreements, like green trade agreements. So the next rounds of trade discussion probably may not be of the comprehensive kind, and it has been 30 years since we’ve had a successful comprehensive trade negotiation. It will be more towards a particular sector, and green is the sector that I am the most optimistic about.
I think the political reality is that the old regime didn’t work out well for a lot of people. It worked out very well for some people, but for many people it did not work out well. And we have to accept where we are and figure out how to work best within the current reality.
What is the thing about the global economy that keeps you up at night?
What keeps me up at night, really, is the war in Ukraine, Russia’s aggression, its attempt to annex an independent country, and what would happen if it were successful to the international rule of law and democracy.
If Russia were to prevail – and I worry that if Trump were to win, he might force a settlement that would be a victory, even if only a partial one, for [Russian President Vladimir] Putin – that would undermine the international rule of law, democracy, and would only lead to more problems down the line. So that is one issue that keeps me up, and I think it has a very big implication for the whole era of globalisation.
I think if that dispute saw Putin defeated and that China was no longer seen as supporting Putin, that would be a big help for the global economy.
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