NEW YORK - Relief that Presidents Donald Trump and Xi Jinping came to a trade truce will likely be short-lived. That’s because the two men have less command over the forces shaping global commerce than they might like to think.
The decline of trade and manufacturing began in the aftermath of the global financial crisis, long before either leader came to power or tariffs started volleying between Washington and Beijing. The trade war has harmed confidence, but it’s just a sideshow to the deeper underlying currents in the global economy, which is driven by the ebb and flow of credit.
On the surface, the weekend agreement to resume talks may have put a floor under sentiment. It didn’t alter the world’s short to medium-term landscape: The U.S. expansion has just become the longest ever, though few are carousing; China is in a long-term slowdown with short-term pain points; and Europe is wobbling. For the past decade, inflation has been quiescent almost everywhere, and markets are still looking to central banks to save the day. The idea that the pomp and ceremony of a Group of 20 meeting will reshape the world economy is a fallacy.
World trade grew rapidly until the financial crisis and, despite a bounce in the immediate aftermath, never regained its vim. It’s been slowing since 2011, aside from brief respite in 2017, largely because of a contraction in bank lending, according to a recent speech by a top official at the Bank for International Settlements.
Global value chains make heavy demands on working capital, much of which is dependent on short-term bank credit, explained Hyun Song Shin, BIS head of research in Berlin six weeks ago. As supply chains grow longer and more complex, they become more dependent on financing conditions. When lending conditions tighten, that sprawl begins to shrink and supply chains become less viable.
The relative strength of the dollar in the post-Lehman era also plays a role, Shin posited. A strong dollar sharpens incentives to repay dollar debt for firms wrestling with leverage, which weighs on supply chains given their dependence on credit. Lenders, meanwhile, aren’t in great shape: Banks have paid billions in regulatory fees since the financial crisis, and an environment of low, zero or negative interest rates is constraining profits.
“In practice, trade and manufacturing are very closely intertwined with finance, especially banking sector credit. … The overextended network of [global value chains] that were strung out across the world in 2006-07 may have been sustainable only with the extraordinarily loose financial conditions that were then prevailing.”
Shin’s observations remind us that reviving the world economy will take a lot more than state summitry. That’s not to diminish the respite when things didn’t fall apart over the weekend. But trade’s best days may not be ahead of us.
In its annual report released Sunday, the BIS lamented that monetary agencies are still shouldering too much of the burden. If Trump and Xi’s handshake is all we get from Osaka, we may not have many better alternatives.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies.