As a presidential tweet ended a stock market rally and instilled new doubt into the prospects for a U.S.-China trade deal, one prominent economist remained optimistic.
While he held out the likelihood that Friday’s deadline for trade negotiations would pass without a deal, Raghuram Rajan, Chicago Booth Katherine Dusak Miller Distinguished Service Professor of Finance, also said that both the U.S. and China needed to create a stable, long-term agreement.
“I want to say that it will be a month,” said Rajan in The Global Outlook: Opportunities and Risks, a general session last week at the Investment and Wealth Institute’s 2019 Annual Conference Experience in Las Vegas. “If we don’t get a trade deal in a month, then the differences will become much larger – and maybe we won’t get a deal at all.”
Rajan explained that both the U.S. and China have arrived at a policy stance where they’re more likely to push each other for better trade terms because they have undergone efforts to shore up their economies.
In the U.S., the 2017 tax reform reduced personal and business taxes on millions of Americans, adding stimulus to what was already one of the longest-running recoveries in modern history. The stimulus allowed the Federal Reserve to proceed along a path of interest rate increases through the first part of 2018.
“The Chinese were also well on the way to restructuring their economy, which they thought was too dependent on investments, exports and easy credit,” said Rajan. “They kept ‘flooding the fields’ over so many years, and that creates problems down the line – so they said ‘let’s try to fix this and go to a more stable structure, less dependent on investments and exports for growth, and more dependent on domestic consumption.”
The moves gave each country plenty of economic ammunition with which to wage a trade war.
Last year, amid a sea of good economic and earnings news, trade tensions ratcheted up as the president pulled out of proposed agreements, like the Trans-Pacific Partnership, and criticized already existing agreements, like the North American Free Trade Agreement (NAFTA).
The U.S. began applying tariffs on four different types of imports from China. “What happened to imports in each of these goods, thee was initially a little bump up as folks anticipated that tariffs would be levied, and then a serious decline in the imports,” said Rajan. “U.S. imports from China started declining. That doesn’t mean that U.S. imports decreased in aggregate, but imports started falling from China.”
The dueling tariffs and trade changes only served to increase monetary policy uncertainty, said Rajan.