Zhu Haibin │ The changes in U.S. trade policies have had a profound impact on the world

Zhu Haibin holds a Ph.D. in Economics from Duke University and is currently the Chief Economist for China and Head of Economic Research for Greater China at JPMorgan Chase, a council member of the China Chief Economist Forum, and a council member of the China New Supply-Side Economics 50 Forum. He previously worked at the Bank for International Settlements, serving as an economist and senior economist. His research focuses on the transmission between the financial system and the real economy, risk management and financial regulation, the Chinese economy, and the real estate market. His research has been published in various professional academic journals, and he has received several international academic awards for his research in real estate and finance.

The following is the full text of Dr. Zhu Haibin's speech:

I'm very happy that I'm the only graduate from Wudaokou who has the opportunity to participate in this forum today. I'd like to share a simple point of view.

There are two main themes in the global economy and the Chinese economy that we need to focus on in recent years. These two themes may be the most crucial in 2018, 2019, and even in the future.

Main theme 1: After the rise of populism, the entire cycle of globalization stagnated or even reversed, especially the potential impact of changes in US trade policy on the global trade system.

Main theme 2: After the global financial crisis, there was a long period of so-called unconventional monetary policy, namely a long-term loose monetary policy. In the past few years, the monetary policy has been moving towards normalization, but in the past two or three months, there has been a major change, and it has returned to a relatively loose state.

If we use these two main lines to observe the trend of the global economy in 2018 and 2019, we can basically explain our judgments about 2019 based on what we have seen in the past year.

From the perspective of the global trade landscape, 2018 was a turbulent year for US trade policy, especially since Trump took office. From the beginning of the year until the G20 summit, the trade friction between China and the US intensified and generally took a detrimental turn.

Outside of China, the North American Free Trade Agreement (NAFTA) was renegotiated, but friction over auto tariffs between the US and EU has persisted for most of the year. Looking at this year (from the perspective of trade coordination), the situation in 2019 is expected to improve significantly compared to 2018, especially in the crucial bilateral trade relationship between the US and China, which has seen very positive changes in the past two or three months. Recent market consensus suggests that the US and China are likely to reach a compromise, a phase-one agreement, in the next month or two. This would prevent further deterioration of tariffs. I believe this is good news for the Chinese economy, the US economy, and the global economy. However, a recent development in trade relations is that the US-EU auto trade negotiations, which initially seemed poised to reach a framework agreement on auto tariffs and seek a peaceful solution, have recently taken a turn.

In the coming months, we may see a report released by the US, which could lead to tariffs on European automobiles, with possible exemptions for some countries. However, overall, compared to 2018, the changes in US trade policy may shift from being a negative factor for the global economy to a relatively positive or neutral factor this year.

Looking at the second main theme, let's examine global monetary policy. Over the past two or three months, as mentioned earlier, the Federal Reserve, the European Central Bank, the Reserve Bank of Australia, and even India and China, have all shown significant changes in their monetary policies, placing greater emphasis on supporting the real economy. Therefore, considering the major economies globally, especially given the Federal Reserve's anticipated three rate hikes in 2019 during the third and fourth quarters of 2018, the market was initially very concerned that further rate hikes by the Federal Reserve could have a deeper negative impact on the US economy this year, especially as the effects of tax cuts weakened.

Therefore, the market is very concerned about when the US will re-enter a recession—in 2019 or 2020? Currently, due to changes in macroeconomic policies, our assessment is that while the US economy will continue to decline, it should stabilize in the second half of the year, and the probability of re-entering a recession in 2020 is significantly lower. These are two analyses representing two relatively favorable changes in the global economy in 2019.

While the situation has improved in the short term, does this mean it can continue in the medium to long term? Relatively speaking, I hold a pessimistic view. Looking at the current path to resolving the US-China trade war, it should be said that this is only a short-term solution. Even after the agreement is signed, its implementation will likely face many setbacks. For example, as everyone knows, in the final stages regarding monitoring and enforcement, will the US insist on maintaining tariffs as a high-pressure tool? This will likely continue to be a point of contention in future implementation. I think the mainstream market opinion may underestimate the potential impact of a trade agreement between the US and China on the future global trade system.

According to foreign media reports, China may pledge to increase its imports from the United States by more than $1 trillion over the next six years, a figure that far exceeds our assessment last year. Increasing China's annual imports from the US from $150 billion to $300 billion is generally feasible, but our current discussion involves a larger shift from $150 billion to $600 billion. Logically speaking, if this is indeed part of an agreement, then frankly speaking, China and the United States, the world's two largest trading nations, are effectively joining forces to launch a new round of attacks on the existing trade system.

This trade agreement itself is a further violation of WTO rules, so it will have a deeper negative impact in the medium to long term on China's current insistence on handling these trade disputes under the multilateral trading system, especially under WTO rules.

I think this is something many people haven't realized yet. Another point Professor Ju just mentioned is that the future competition between China and the US may not be about tariffs. It may be entering a new phase where technological conflicts, especially those stemming from non-tariff issues, become the new normal. As discussed last year, the changes in Sino-US relations over the past few years are a long-term process. Sino-US relations cannot return to what they were before. Therefore, I think that in the medium to long term, the profound impact of this shift of China's industrial chain overseas will continue.

Finally, let's talk about monetary policy. If it loosens, one potential long-term harm to the world is related to the global leverage ratio. We just discussed China's leverage ratio. Have you noticed that recently, the US, Europe, and Japan have all cited the US as a successful example of deleveraging? However, in reality, the US's overall leverage ratio hasn't decreased; it's still basically around 300% of GDP.

However, a very common phenomenon has emerged in the US, Europe, and Japan: the deleveraging process is actually more of a shift in leverage. In other words, leverage is shifting from households and businesses to the government sector. The logic is simple: government debt only pays a risk-free interest rate. Therefore, during this shift, the burden of interest payments shifts from businesses and households to paying a risk premium, which significantly lowers interest rates. But in the medium to long term, persistently high debt levels will exert a strong constraint on global monetary policy.

Therefore, since 2008, major global economies have successively entered a period of zero interest rates. In the recent round of monetary policy normalization, it is actually difficult for monetary policy interest rates to return to previous normal levels. This will bring constraints and limitations to monetary policy due to debt levels or risks in the financial system. I think this will be a long-term impact.

That's all I have to say, thank you everyone.