2021 should Mark Turn away from Trade Protectionism / Risk Assessment Needed in Financial Markets

To overcome the novel coronavirus pandemic and put the global economy back on a full-fledged growth track, it is essential to rebuild the free trade system. The year 2021 should be a turning point for that purpose.

The new administration of U.S. President-elect Joe Biden will be inaugurated this month. It is important for Japan, in cooperation with Europe and other countries, to heighten its efforts to encourage the United States to change the “America first” protectionist stance adhered to by the administration of U.S. President Donald Trump, and become an economic driving force through the promotion of free trade.

■ U.S. must address disparities

The world economy has developed through international cooperation since the end of World War II, with the liberalization of trade and globalization that allowed the free exchange of people, goods and funds.

However, the benefits have slanted toward multinational companies that can operate across national borders and wealthy people, leading to the side effect of widened income gaps. The combined assets of the world’s top 26 richest people are reportedly almost the same as those owned by about the poorest 3.8 billion people.

Protectionism has spread due to opposition to globalization, and as a result, the Trump administration was born in the United States.

Under these circumstances, the coronavirus has poured salt on the wound. The infectious disease has battered the service industry, which has many low-paid workers, such as dining establishments and tourism, and is further widening disparities.

How to contain this situation is a common issue for each country.

Biden has made redressing disparities a priority policy. Aiming for a “big government” that emphasizes active fiscal spending, he has come out with a four-year plan to spend $2 trillion (about ¥200 trillion) on infrastructure and the environment. The new U.S. government also intends to raise the minimum wage significantly.

The Biden administration aims to secure financial resources for this investment by raising taxes on wealthy people and large companies. It apparently aims to boost the income of the middle class through such measures, but coordination between the ruling and opposition parties in Congress will be a challenge.

On the trade front, Biden has announced a return to multilateralism. However, it is unclear whether the government will be able to completely break away from protectionism, since the new administration is unlikely to change the current policy of prioritizing domestic employment and industries.

The focal point will be whether the United States will return to the Trans-Pacific Partnership (TPP) multilateral free trade pact. Although Biden has not clearly mentioned the issue, some of the people around him have deep-rooted cautious opinions, and whether the United States will return to the TPP remains to be seen.

Japan, along with Australia and other TPP member countries, should persistently explain to the United States that its participation in the TPP would be useful in restraining China, which is trying to take the initiative in the field of trade.

It is hoped that the United States will regain its leadership in rebuilding the framework of the Group of 20 major economies, whose presence has weakened, and the World Trade Organization, whose top post remains unfilled.

Regulations on the giant U.S. information technology companies known collectively as GAFA, including Google LLC and Facebook Inc., are also important. The international community as a whole, including Japan, should cooperate to deal with this challenging issue.

■ Dealing with China

China, which contained the spread of the coronavirus at an early stage, is believed to be the only country last year that achieved positive growth among major economies. High growth is also expected in 2021.

Under these circumstances, how to face China, which is trying to increase its influence on the world, is a difficult problem for Japan and other countries.

Last year, countries including Japan, China, South Korea and the Association of Southeast Asian Nations signed the Regional Comprehensive Economic Partnership (RCEP) agreement. In addition, Chinese President Xi Jinping has clearly said that China would consider joining the TPP pact. There is a possibility that China will apply for TPP membership.

However, the TPP participant countries have reached high-level agreements on tariff elimination and trade rules. Member countries should make it clear that a new country will not be able to participate in the pact unless it reaches the appropriate level of liberalization.

Efforts must be made to correct China’s unfair trade practices by taking advantage of this opportunity.

Major countries are far from putting an end to their large-scale monetary easing measures, and financial markets around the world are flooded with funds.

■ Record-high stock prices

The U.S. Federal Reserve Board, which has revived the de facto zero-interest rate policy, has said that it likely will not raise rates until the end of 2023. The European Central Bank is also expected to continue its massive monetary easing.

Against this backdrop, the stock market has been at high levels, with the Dow Jones Industrial Average of 30 significant stocks traded on the New York Stock Exchange exceeding 30,000 points last year for the first time. Attention should be paid to whether there is any latent risk in the historically high stock prices.

It is also worrisome that global government debt has been swelling due to the coronavirus crisis. It is estimated that the government debt-to-gross domestic product ratio of advanced countries in 2021 will exceed 125%. This is the worst level since the end of World War II. It is essential to be wary of a sharp rise in long-term interest rates, among others.

Developing countries with fragile fiscal structures are vulnerable to crises. Major countries should deal flexibly with the situation, through such measures as reducing or eliminating their debts.