MACROECONOMICS the surface of what is possible to

entice foreign capital. Second, it will seek to engage the US in talks when possible, but the US reversal of an agreement in May, under which China would have stepped up its purchases of US goods, has soured the atmosphere.

Tird, China will go ahead with its broad strategy and cautious opening up of its economy to foreign producers. Tis includes the recent easing of foreign ownership rules for banks and asset managers. China’s Belt and Road Initiative will proceed, but poor lending and governing practices that will more uneven and fragmented Fourth, given the trade imbalance, China is not able to match the US escalation in the tit-for-tat tariff moves, but it can be expected to find asymmetrical ways to express its displeasure. Moreover, the extensive use by the US of sanctions and embargos creates opportunities for China to frustrate US aims.

Te environment for many emerging market countries may not change for the better, despite what some see as attractive valuation measures until

investors have greater confidence

that the policy mix in the US (tighter monetary policy and looser fiscal policy), which is sucking in the world’s savings, is going to change. Tat may still be a year away. At the same time, the sharp currency depreciations seen in several countries will see produce dramatic improvement in


it liſts their prices, which also makes them less competitive.

To preserve the World Trade Organization, substantial reforms are necessary. Part of the US and, to a less extent, the European argument is that the current WTO rules did not anticipate C h i n a ’ s machinations . Talks


mo de r n ize the WTO are underway, and while nothing is imminent, p r e l im i n a r y results


possible over the next couple of years.

Te world

external balances, while the domestic weakness that will ensue reduces demand for foreign goods.

Meanwhile, the US trade deficit

is likely to continue to deteriorate despite (and partly because of ) the tariffs and threats of more tariffs. Te expansionary fiscal policy runs counter to the efforts to reduce the trade deficit as part of the aggregate demand (~15%) will be meet by foreign-generated supply.


tariffs the US imposes boosts the price of those goods in the US, and to the extent that some of the imported goods are used in exports,

was torn as under aſter the Great Depression. Te years aſter the Great Financial Crisis have challenged the liberal global order that emerged aſter WWII. Tat rear- guard action has not been turned back and can be expected to persist in the period ahead. Economic rivalries have supplanted ideological divisions. Geopolitics may receive less attention, but a new block is forming, with Russia, Iran, Syria, and possibly Turkey.

Marc Chandler

Global Head of Currency Strategy Brown Brothers Harriman

FX TRADER MAGAZINE October - December 2018 9

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