President Trump’s “America First” strategy has consistently favored unilateral action over promoting international economic cooperation. That must change, as must his failure to marshal bipartisan legislation in difficult moments, because these are precisely the qualities that are needed if Trump is to meet the economic challenge posed by the novel coronavirus pandemic successfully. This is especially true at a time of divided government.
By now, it should be clear that the coronavirus epidemic respects no borders. It has spread to more than 100 countries, including the United States. Nor does it spare individual countries based on their importance to global supply chains or geopolitics, such as China, Italy, Japan, and South Korea.
China, the world’s second-largest economy and, until recently, the world’s main engine of economic growth, has been put into the economic equivalent of a cardiac arrest by the coronavirus epidemic. This has occurred as the epidemic has prevented literally tens of millions of Chinese workers from returning to their jobs after the Chinese New Year.
The consequent disruption to the Chinese economic powerhouse has had the effect of interrupting global supply chains, precipitating a collapse in international commodity prices, and seriously dimming the economic prospects of China’s Asian trading partners. This has not helped investor confidence, especially at a time when the coronavirus epidemic has taken firm hold in both Japan and South Korea.
Another important economic victim of the coronavirus epidemic has been a heavily indebted Italy, the Eurozone’s third-largest economy and the world’s third-largest sovereign debt market. The Italian economy has now been upended by the collapse in its tourist industry as foreigners cancel their vacation plans, as well as by the government’s decision to put the whole country on some form of lockdown. This makes it difficult to see how Italy will not have a deep economic recession, which will itself give rise to another round of the Italian sovereign debt crisis, which would be the last thing that a weak global economy needs at this moment.
The dark cloud that the coronavirus epidemic has cast over the global economy already has precipitated a sharp sell-off in global equities. This global equity market rout has hardly spared the U.S., where equities have now declined at a disturbingly rapid pace, by around 25% from their pre-coronavirus highs. According to the Federal Reserve’s estimates, if sustained, such a decline in equity prices alone could reduce U.S. GDP by 1.5%.
More troubling yet for the U.S. and global economies are clear signs that the global credit bubble spawned by years of ultraeasy monetary policy may now be finally bursting. With international oil prices collapsing, it would seem only a matter of time before the heavily indebted U.S. shale oil industry starts defaulting on its loans. It would also seem to be only a matter of time before the heavily indebted emerging-market corporate sector and troubled international airlines encounter serious debt-servicing problems.
Past experience with global credit crunches is that they tend to amplify economic downturns greatly by starving companies of credit at the very time that they most need it. This has to be of major concern to U.S. policymakers, particularly at a time when stock market troubles are dealing consumers and investors a severe body blow, depressed overseas markets are hurting U.S. exporters, and the American travel and entertainment sector is reeling from the population’s fear of getting infected with the virus.
Among the lessons that should have been learned from the 2008-2009 Great Recession is that the favorable resolution of a global economic crisis is best done in a coordinated and coherent manner. Such an approach is very much more likely to restore investor and household confidence than is a series of parallel, unilateral actions. For such coordination to occur, it would be vital for the U.S. to offer the kind of decisive leadership to the world community that it has offered in previous global economic crises.
It is for this reason that one has to regret that over the past three years, President Trump has both disdained international cooperation and, in some cases, gone out of his way to undermine multilateral organizations’ legitimacy. It also has not helped that Trump’s pursuit of an America First policy has soured relations with a number of his key counterparts and has undermined trust in his ability to provide the world with much-needed American economic leadership.
Another reason for regret is Trump’s poor record on healing domestic political divisions and on seeking a bipartisan approach to economic policy-setting. This would seem to be especially the case at a time when the Republican Party has lost control of the House of Representatives, and at a time when the Federal Reserve is no longer in a position to assume the full burden of propping up a weakening domestic economy. It would also seem to be the case when the bursting of an asset-price and credit-market bubble will require the sort of bold policy response that we saw in the wake of the September 2008 Lehman bankruptcy.
Hopefully, chastened by the recent stock market meltdown, Trump might drop his earlier antagonism toward international cooperation and his my-way-or-the-highway approach to domestic economic policy-setting. If not, in the months ahead, we should brace ourselves for some very rough sledding in both the U.S. and global economies.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging-market economic strategist at Salomon Smith Barney.
