On the sidelines of the Asian Financial Forum in Hong Kong, New Europe’s correspondent Federico Grandesso spoke with former World Bank President Robert Zoellick about the actual global economic challenges that the world is facing today. Prior to serving as the head of the World Bank, Zoellick was a managing director of Goldman Sachs, United States Deputy Secretary of State and US Trade Representative under George W. Bush from February 2001-February 2005.
New Europe (NE): What do you think about the possibility of a ‘no-deal’ for Brexit and what are the key challenges for the global economy this year?
Robert Zoellick (RZ): A ‘no-deal’ Brexit would be a disaster. Obviously, this is for the British people and the Parliament to decide, but this issue is not only important for the EU, but it is a question for the world economy as well.
The second issue is the course of monetary policies. We had about 10 years of extraordinary monetary policies and now there a tendency for people who have lived through an exceptional period for so long to think that this is the norm. Any time you have a tightening cycle, this will always increase the chance for greater risks.
In this case, we are at the end of quantitative easing policies, which left central bankers with the task of having to feel out their way to go. Central bankers are highly confident, even if they sometimes like to convey the image of a wizard, they are, in reality, making it up as they go to.
The Federal Reserve is the leader in this (adjusted monetary policy). But you can also see it in the Eurozone with the ECB. Japan will continue to have a quantitative easing policy. In China, there is a challenge where they are trying to reduce the number of overleveraged banks, but as the economy slows they are looking for ways to expand credit. Let’s see how it will work.
After that, there are some very well known trade issues involving the US, China, the EU, etc, and you also have some of the geopolitical risks.
NE: Which signals do you see coming from Washington?
RZ: I think, on the positive side, the US economy still has momentum, though it slowed in 2018, I think that the low level of unemployment and consumption will continue to move the economy relatively well over 2019, but the markets are anxious because of these different factors. Moving further on to 2020, I think the risk increases.
NE: What do you think about the US-China negotiations on the hot issues?
RZ: There is the short term and the longer term. In the longer term, I don’t agree with President (Donald J.) Trump‘s approach to trade because I think he is fundamentally a protectionist and we should reduce barriers instead of raising them.
His focus on China has led to a combination of concerns in the US and in Europe, Japan, and others. One is about market access for technology transfers, intellectual property rights, tariffs, and joint ventures, etc., …I think China is making some progress on some of those issues and I think Beijing will also have a purchasing programme, but then you get to the second issue which is the anxiety about state capitalism.
Over the past 4-5 years, the state increased its role in China and you have the “Made in China 2025” initiative and depending on how who you talk to in China, some people will say “Well, that’s more of a framework. It’s not necessarily a government policy”. But the reality is that to the outside world it looks like a way to try to dominate the technologies of the future. I think that whatever is done in the near term to avoid tariffs would be right, but these underlying issues I talked about will continue.
Ironically there are some in the US who think that if President Trump wants to do a deal because he is concerned about the markets, he will not go on some of these long term issues. (Current US Trade Representative) Ambassador (Robert) Lighthizer’s comments in the past have tried to suggest that you can somehow decouple the US and Chinese economies.
I think that would be very difficult. One of the questions would be if he feels the political compulsion to do a deal, what the process would be that will be put in place to deal with one side’s issues over the longer term. The potential contradiction of this is that the issues I described really require someone to deal with them using rules and with a system as well as some procedures and norms, while President Trump’s policies tend to move away from all of those.
NE: What moves will President Trump carry on in this regard?
RZ: It is always hard to tell. President Trump is driven very much by his impressions, his own political feel. Trade is an issue like ‘the wall’ and immigration where his actions go with his sense of his political base.
Colleagues in China have been struggling with this a little bit. First, they thought they understood Trump and they thought they could close a deal with him, but I think they misread him. For the world economy. it is hopeful that they might reach some sort of accommodation, but my caution is that the underlying problems (mentioned above) will not go away.
NE: How do you see the frictions between the EU and the US over trade?
RZ: The biggest concern for the EU is the auto industry. I think that the EU’s delegation that President (Jean-Claude) Juncker led approached President Trump wisely. They created the basis for negotiations. I don’t think that’s going anywhere, but it goes back to the China issue. This is the time when President Trump is trying to force issues with China. The question is, does he wants to get into a fight with Europe at the same time he is worried about the markets? Predicting President Trump is a difficult game, but I think what you see with Europe is some tough language, some tension and frustration, but I hope that they don’t take the step towards increasing barriers, particularly in the auto sector where the consequences could be quite big for everybody.