“Protectionism might lead to an interruption of trade” – Transatlantic Call with David Lipton, First Deputy Manager of the IMF
On the occasion of Atlantik-Brücke’s first Transatlantic Call, Dr. Christian Pfrang, Lex Columnist at the Financial Times in New York, interwieved Dr. David Lipton, First Deputy Managing Director at the International Monetary Fund. During their phone call they talked about the G20 and its new leaders on stage, international growth, the importance of free trade and the current situation of monetary stability.
Dr. Lipton, you were at the recent G20 meeting. How did you experience the atmosphere compared to earlier summits? And did you shake President Trump’s hand?
Well, we did say hello to each other. I was in the room for the meeting of all the leaders. Whenever the leaders are together, there is a chance for people taking each other’s measure and trying to do a little diplomacy on the side. But I think, this year the atmosphere was special because of the presence of President Trump. The leaders were all very curious to hear him speak, to try to understand the view points of the new administration. There were concerns about how that would go. It was a quite lively meeting actually.
What core message did the US delegation deliver?
It began of course with all the preparatory meetings. Often these meetings start ahead of time discussing the communiqué and what the statement will be. You can see in those discussions the direction that this is going to go. Clearly, the United States administration has a view that the rules that have governed international economic issues are important and that the institutions that have been built have delivered a lot for many countries including the United States. But the other countries have not entirely played by the rules or have one way or another taken advantage of the United States. So, there is a need to level the playing field. The administration has expressed in various ways at different times its willingness to do that less through multilateral means and more through bilateral means and if need be through forceful means. However, President Trump added in his opening remarks the important message that once this is accomplished the USA wants more trade and a continued interconnectedness of the global economy. That poses a challenge not just to the transatlantic relations and to Europe but to the whole world how to interact with the US to achieve a mutually beneficial relationship.
How did you see global leaders react to this message and how should Europe engage with the Trump administration on these issues?
It was clear in the negotiating sessions and then in the meeting that countries very much want to have a dialogue and want to continue this multilateral approach to dealing with the problems of the world. And even though the Trump administration injected some new thinking into the communiqué with respect to very sensitive subjects like climate and trade and sustainable development, other countries gave the United States wide berth. Their view was that one should talk about what can be accepted and what cannot be accepted. But let us also try to make sure that we have a dialogue and that we keep talking to each other. From my standpoint, it is very important that European and other countries as well don’t find the argument very persuasive to level the playing field. They may also not agree with some of the prescriptions of the Trump administration for what to do in the world. On the other hand, it is also clear that some of the American complaints have a germ of truth: Our institutions are not perfect, many of our trade agreements have been in existence for some time, the world is changing. There is plenty to talk about in terms of what really works for everyone, how to deal with the negative side effects of globalization and interconnectedness. So, I think, the right answer is: Let us see where there is a basis for continued collaboration because that is far superior to seeing a breakdown of dialogue and a return to bilateralism or even unilateralism as a form of diplomacy. The clear decision of the other 19 countries was to try to proceed with some dialogue.
What risks do you perceive if transatlantic partners fail to find a basis from which to address issues of globalization?
Our international economic system has been built on seventy years of cooperation. And there are many opportunities still ahead. But there is also the risk of some disintegration of the international order if there is a failure of dialogue and a failure of cooperation. We would certainly hate to see a return to forms of protectionism that might lead to an interruption of trade and finance. It is important that these two sides have this dialogue, and it really is two-sided. The United States has to embrace that it can ask for consideration of its complaints. In the future, continued interconnectedness is not just key to emerging markets in developing countries that need trade, technology and investment in order to grow rapidly and have some convergence of their living standards to those of richer countries. It will benefit the United States as well because in the future those will be the trade and export and investment opportunities. There is plenty of opportunity to deepen the interconnectedness, to share technologies and to improve the interconnections through further trade negotiations.
President Trump has highlighted how important deficit reduction is to him, he has singled out Germany for its trade surplus. How worried should we be on either side of the Atlantic about movements in this area?
The subject of imbalance is an important one. We at the IMF have it in our mandate to address. We have just finished our annual examination of global imbalances and put out what we call our external sector report. The case is remaining that there are some substantial deficit countries and substantial surplus countries. Those are now concentrated more in advanced economies than in emerging market economies where those imbalances were more prominent a few years ago. Deficit countries by the nature of deficits eventually have to adjust because they are borrowing every year and borrowing can only go on so far. There is a bit of a asymmetry: Surplus countries are acquiring claims on other countries since there is no natural adjustment mechanism. If only the deficit countries adjust and the surplus countries don’t this is what happens: There is a reduction in import spending and that absence of increase of import spending from the surplus countries leads to slowdown of growth. We see this is as a modest-sized problem. We want to see it addressed. We tend to view it from the multilateral, global perspective. It is an argument for cooperation. The Trump administration tends to view the subject more from the bilateral standpoint whether some of its trading partners have trade or other economic practices like subsidization of industry sectors that should be ended with the hope to narrow imbalances. It will be best for the international system if both the deficit and the surplus countries do their part in order to fix this special problem.
You have mentioned the necessity to maintain interconnectedness. Can you give a practical example with regard to TPP?
What is even more important than the imbalance issue is that there be ways in which productivity which has been slowing down is accelerated. Many of the calls that have come from the German government and other governments for structural reforms and for taking steps to try to use the new technologies in order to increase growth will be very important to the rich and to the poor countries. One aspect of that is that these new proposed plurilateral trade agreements like TPP and TTIP try to get at that subject. With tariffs already reduced to low levels, there are other frontiers for collaboration. For example, there can be a harmonization of regulation whether it is in automobile safety or pharmaceuticals. These alignments across countries save costs. Right now, a German automobile manufacturing company needs to have one model for the US market, another one for the European market and maybe even a third one for another market. And cost savings would lead to higher productivity. A second aspect is that structural reforms that are needed to boost growth are hard decisions to take politically. And sometimes a government can join into a trade agreement and commit itself to take the hard structural reforms and get things done that might otherwise would not be possible. Japan for example, was ready to join TPP and in that context to reform the agricultural sector. These are not reforms that Japan can easily do politically without this big international commitment. And now, with TPP sidelined by the decision of the US not to pursue it, it is proving hard for Japan to take measures that otherwise they might. I suspect that there are opportunities like that for Europe in pursuing TTIP or some version of a similar transatlantic trade agreement. Everyone can commit to do things they know they need to do, things that will raise productivity and growth and that way make TTIP a win-win proposition.
We have seen varying signals from the administration regarding TTIP. What kind of deal would be palatable to the Trump administration?
I am not sure what the political path will be. It is important to put the different mutual gains back on the table. The US administration has expressed a preference for having bilateral trade negotiations. Perhaps there can be some discussions between individual countries and the US that can identify potential win-win propositions. Then it can become clearer that doing this altogether would even be more beneficial.
How should Europe position itself with regard to China’s “One Belt, one Road” strategy?
’One Belt, one Road’ is really two different initiatives, one economic, one political. There are many parts of the emerging market world that under previous trade agreements have done a huge amount of liberalization. This has opened the door for interconnectedness. But until countries are linked together in terms of their infrastructures, it is really just a framework. The Chinese interest in ‘One Belt, one Road’ is a way of saying: Let us try to mobilize finance and carry out some of the infrastructure investments that will give us mutual gain but in doing so lay down the infrastructure that will hook up our countries and make the gains from interconnectedness easier to attain. There is also a political aspect to it with the demise of TPP. The Chinese see a political opportunity in being more of a leader in the subject of pursuing interconnectedness in its region. This is an opportunity for all of the countries that might participate with China. It is one where Europe certainly can play a role. The Chinese are asking us very specifically how to leverage the initiative in order to get a kind of co-financing, to get investors of other countries interested.
How do you view Germany’s “Marshall Plan for Africa”?
We have worked strongly with the German government from the beginning of its year as serving in the presidency of the G20 to develop what was originally called compact with Africa. It is a very important initiative. The IMF is helping countries that are going to participate in this to have the capacity in their governments, to be able to attract investments. What will be needed is a follow up in the coming year to try to interest private investors to go to the countries that are designated. I hope this will lead to some success that can be emulated by other countries in the region. This initiative includes the political motivation to try to make sure that Africa, especially in the northern parts of the continent, does not fall into very difficult economic circumstances or into political conflict in a way that would exacerbate the outflows and migration of refugees.
People close to the US administration have accused Germany of being a currency manipulator. The IMF and Germany have clashed over the resolution of the Greek debt crisis. How do you see the impact of Germany in Europe and the world today?
We at the IMF consider Germany to be a very important member country. We have very good relations and Germany helps with an awful lot of international initiatives and played a central role in the presidency of the G20. That is impressive. Germany’s economic strength has been important in carrying Europe through the very difficult period since 2012. Germany has forcefully argued for structural reforms that can boost growth in Europe and continues to play a role along other important European countries in providing a kind of global leadership in support of our institution and its mandate for growth and stability in the world. Do we sometimes have disagreements? Yes. We have identified that the German current account surplus should be addressed. Germany has had a surplus above four percent of GDP for thirteen years now. I think, its origins go to the foundation of the eurozone, the Hartz reforms and to the fact that Germany does not have a monetary or exchange rate policy. It would certainly benefit Germany, Europe and the world if there was a concerted effort to try to reduce it by several points of GDP. When Germany has a surplus of eight percent of GDP it means that its income is eight percent higher than its spending. Germany is acquiring foreign assets mostly treasury bills being bought by the companies that manage ordinary German’s pension funds and insurance plans. And those are yielding very modest returns over the last years. Where at the same time Germany has infrastructure needs that would bring a much higher return to the society by improving the profitability of the private industry and strengthening competitiveness for the longer term. Some adjustment with smaller surplus and some greater spending at home should be something that can be orchestrated and that would be beneficial.
German banks and savers complain about low interest rates. Others worry about the potential for inflation from excessive monetary stimulus. Where are we in the process of interest rate normalization and which risks do you see?
The United States is seeing inflation starting to return towards its target and has begun a process of normalization of interest rates although they are proceeding extremely slowly. I think, in Europe the process of inflation returning to target appears still to be very slow. Mario Draghi, the head of the EZB, has said so just a few weeks ago. There is no need to raise interest rates until there is some indication that wages and prices are heading back to target. It would be actually counterproductive if there was a premature normalization or even if markets began to anticipate it because that would mean that the higher interest rates, the higher capital costs and the steepening of the yield curve might all be unhealthful for the standpoint of growth. The bottom line is that the world is going to see sustained asynchronicity of monetary policy with the USA normalizing, with Europe in a watchful mode and with Japan still also very far away from beginning normalization.