The Global Trump: Structural US Populism and Economic Conflicts with Europe and Asia 3030217833, 9783030217839

Table of contents :
Preface......Page 5
Contents......Page 16
About the Author......Page 21
List of Figures......Page 22
List of Tables......Page 25
Part I: The Background to Trumpism and Economic Explanations......Page 27
1: Introduction......Page 28
References......Page 42
2: Inequality, US Survey Results and Economic Analysis: The Case for Structural Trumpism......Page 43
Tax Avoidance Problems, Foreign Direct Investment and G20......Page 56
Income Dispersion......Page 60
Economic Inequality Approach Versus Cultural Backlash Hypothesis......Page 66
Relative Income Shares and Absolute Income Levels......Page 70
US Survey of Consumer Finances: Analysis by Janet Yellen......Page 73
Effective Real Per Capita Income and Health System Problems......Page 77
What Drives Health-Care Costs in the US?......Page 86
Council of Economic Advisers: Biased Per Capita Consumption Comparison of the US with Europe......Page 88
CEA Conjectures on a Comparison of Per Capita Income Between US and Nordic Countries......Page 90
Child Poverty in the US Versus Child Poverty in Switzerland......Page 97
Policy Priorities in an Open Economy: The Case of Switzerland......Page 98
What Causes Rising Inequality in OECD Countries?......Page 99
US Policy Aspects......Page 109
Populism and the Internet......Page 115
Political Polarization......Page 116
Two Destabilizing Mechanisms of the International Economy: Nationalism and Excessive Banking Deregulation......Page 118
References......Page 119
The Political Debate About Trade and Globalization......Page 125
Trade, Protectionism and Production in a National and Global Perspective......Page 130
Trump’s Fiscal Impulse......Page 135
Inconsistent Views on the US International Trade Position......Page 138
What Is the Problem with Globalization?......Page 149
Globalization and Trade in an International Perspective......Page 154
US Mid-term Elections 2018......Page 156
Taking Back Control: Wishful Thinking and the International World......Page 157
References......Page 160
Part II: Transatlantic Economic Relations......Page 163
The NAFTA Trade Conflict, New NAFTA and the US-China Tariff War in a Global Perspective......Page 164
Heterogeneous Firms, Trade and Employment......Page 167
The Size of the Transatlantic Effective Per Capita Income Gap......Page 169
US Imports of EU Cars as a Threat to US Security?......Page 172
New Trade Conflicts and the Reform of International Organizations......Page 174
National Economic Policy and Globalization Plus China’s Growth......Page 177
Common Populism Denominator in the USA and the EU?......Page 182
Populism in Italy......Page 185
Inequality Perception......Page 186
Trumpism and the Conte Government in Italy......Page 187
References......Page 189
5: EU Reform Problems and the Rise of Populism in Europe......Page 190
Trumpism and Brexit......Page 203
Brexit and Financial Market Perspectives......Page 207
US Brexit Perspectives......Page 208
Regulatory and Security Perspectives......Page 213
References......Page 216
Appendix Part II: Adapted from Welfens (2018c), EIIW Discussion Paper No. 252......Page 219
What Is Free Trade and How Will Protectionism Affect Income Per Capita in the Long Run?......Page 225
Protectionism and Long-Run Per Capita Income: Perspectives in a New Growth Model......Page 226
Capital Market Dynamics in the Context of Brexit and Related US Aspects......Page 234
Part III: US-Asian and Global Economic Perspectives......Page 238
The US-China Tariff Conflict and Its Impact on the EU27, the UK and Asia......Page 239
US Protectionist Trade Policy Vis-à-Vis China......Page 244
Is China a Challenge for the EU? Indeed, via a Destabilization of the US......Page 252
APEC Challenges and Asian-EU Perspectives......Page 254
References......Page 260
7: China Risks and Challenges......Page 261
New Global Governance Issues......Page 267
References......Page 269
Part IV: Policy Innovations and Systemic Reforms......Page 271
8: Policy Conclusions for International Organizations......Page 272
Differentiated Economic Globalization......Page 275
References......Page 279
9: International Policy Conclusions......Page 280
Perspectives......Page 284
Further Perspectives......Page 289
Why Defending the Western Liberal Order Is Crucial—New Proposals......Page 290
Policy Innovation for Unbiased Ratings......Page 294
References......Page 298
10: Canada, the US and Eurozone: Implications for US Reforms......Page 300
Some Further Conclusions......Page 305
Transatlantic and Transpacific Health-Care Dialogue—and New Prospects......Page 307
Selected EU Problems and OECD Perspectives......Page 313
A View on the OECD......Page 319
Improving the Digital Economy......Page 320
Crucial New Prospects for Cooperation in Climate Policy......Page 321
Post-Trump Perspectives......Page 323
References......Page 324
Appendix A: National Income Shares in Selected World Regions and Countries, 2016......Page 326
Appendix B: Full Price Discrimination∗......Page 327
Welfare Loss from Taxation (and Import Tariffs)......Page 328
Appendix C: IMF World Economic Outlook, October 2018......Page 329
Appendix D: The Sorcerer’s Apprentice (Original from Johann Wolfgang von Goethe, English Version: Translation by PJJ Welfens)......Page 331
Appendix E: Tariffs and Counter-Tariffs—An Overview of the Trade Conflict in 2018......Page 333
Appendix F: Recent Research on Inequality Dynamics and Skills......Page 336
Appendix G: OECD Health Indicators: Infant Mortality and Life Expectancy......Page 337
Appendix H: US Civilian Population/Total Number of Households, 1984–2017......Page 339
Appendix I: Transfers and Openness—Traditional and Value-Added (2007, 2009, 2011)......Page 340
Appendix J: US Protectionism and the US-Sino Trade Conflict: Optimum Import Tariff of a Big Country with Inward-FDI......Page 344
Appendix K: China’s Overseas Direct Investment Flow and Stock, 2007/8–2016, US $......Page 346
References......Page 348
Index......Page 363

Citation preview

THE GLOBAL

TRUMP Structural US Populism and Economic Conflicts with Europe and Asia

PAUL J. J. WELFENS

The Global Trump “With Donald Trump in the White Office, the world wonders, how did this happen and what does it mean for us? In this riveting, penetrating and timely book, Paul Welfens answers with insights that are thoughtful, well reasoned and compelling. This book is able to explain and analyze what has eluded both scholars and thought leaders in business and the media—how and why populism has grabbed center stage and posits new strategies for political and economic stability and prosperity in this new era of Trump. The book is not just ‘must’ reading to everyone interested in contemporary global affairs, it is also engaging and a pleasure to read.” —David B. Audretsch, Distinguished Professor, Indiana University, Bloomington “Paul Welfens has produced a highly perceptive and timely analysis of US economic populism in the Trump era and the international implications. He emphasizes the structural failures of the US economic system to constrain rising inequality, in comparison with the relative success of the European social democratic systems, and emphasizes that US populism will is therefore likely to persist in the years ahead. With great skill and insight Welfens traces the implications of US populism for the global economic system and for Europe’s geopolitical and economic choices.” —Jeffrey D. Sachs, University Professor at Columbia University “How Europe responds to U.S. President Trump’s provocations and erratic decision makings will shape its place in the world, and in global geopolitics in particular, for years to come. In this timely book, Paul Welfens both provides valuable insight into U.S. politics and describes the strategic options for Europe going forward.” —Barry Eichengreen, University of California, Berkeley “Paul Welfens has written an important and timely book on the consequences of U.S. President Trump’s economic policies for the American, European, and Asian economies. It offers a rich fare of information on the roots of American and European populism and its dangers for our political stability and economic wellbeing. Its critique of Trump’s fiscal and international trade policies and their weak intellectual basis deserves the attention of U.S. and European readers alike.” —Richard H. Tilly, University of Münster, Germany

Paul J. J. Welfens

The Global Trump Structural US Populism and Economic Conflicts with Europe and Asia

Paul J. J. Welfens European Institute for International Economic Relations (EIIW) University of Wuppertal Wuppertal, North-Rhine Westphalia, Germany

ISBN 978-3-030-21783-9    ISBN 978-3-030-21784-6 (eBook) https://doi.org/10.1007/978-3-030-21784-6 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: Bob Daemmrich / Alamy Stock Photo This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

The presidential elections in the West’s leading economy, that is, the US, always attract a great deal of attention: from international market participants, the governments of (particularly partner) countries, as well as ordinary citizens around the world—with President Donald Trump, the level of global attention was obviously very high. His political victory in 2016 came as somewhat of a surprise, and his new economic policy, including the weakening of transatlantic cooperation and the US-Sino and US-EU tariff conflicts, marks a new chapter in modern economic history. Trump’s surprising victory has to be explained, and there is also the crucial question of whether “Trumpism” (as the current phase of US populism is referred to here) is a transitory phenomenon or a more long-term challenge. This study shows that there are good reasons to expect that populism is a structural problem for the US, which may continue long after the Trump presidency, and therefore, US nationalism and protectionism are new problem areas facing Europe, Asia and the other regions of the world economy. Trump’s economic policy is a rather new and partly contradictory mix of policy measures, including import tariffs, which raises the question of how sustainable and successful his approach will be. Trump’s political vision is one which wants to lead the US back to good old historical times when the American manufacturing industry was still the driver of US growth—steel and coal were still important sectors of the economy. This backward-looking perspective is not much v

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­ ifferent from the Brexit majority in the British EU referendum of 2016: d a rather vague rhetoric centered on taking back control while ignoring the real world with its new challenges, ranging from climate change to the rise of China and the dynamics of globalization. In Germany, the “globalizers” in turn are also refuted by the populist right-wing Alternative für Deutschland, also known as the AfD (in English, the “Alternative for Germany”) party. The historical origins of the transformative process referred to under the heading of globalization lie, on the one hand, in the year 1860 with the signing of the Cobden-Chevalier trade treaty between the UK and France, a step toward free trade that encouraged other countries to quickly follow—with positive real income effects for so many, and, on the other hand, with the first group of international organizations to be created in the period 1865–1899, ranging from International Telegraphy Union and the Universal Postal Union to the International Telecommunications Union (to use the modern name) to the International Court of Justice. Under President Trump, the Trump Administration has indicated in 2018 that the US wants to leave the Universal Postal Union. The strange reason given for such a move is China and claims that the US is treated unfairly; the US argues that China is treated too favorably as it still has the status of a developing country which it certainly no longer is. However, why not try to solve the conflict within the framework of that organization? Do the complaints of the US really require leaving such a long-standing international organization? The Trans-Pacific Partnership (TPP) of 2015 was ready to come into effect for 12 countries, but the US under the Trump Administration said no at a rather late stage, and hence only 11 countries have started TPP. Many thousands of scientists from American, European, Asian, Australasian and other universities have carefully accumulated evidence on global warming, just as surely as the glaciers in Switzerland have been melting over more than a century as postcards, old and new, show. However, President Trump’s climate policy argues that world leaders and governments can ignore such scientific analysis. The popes who ignored Copernicus and Galileo Galilei had a similar (ultimately misplaced) perception, as almost everybody understands these days that the Earth is not the center around which the sun orbits, but planet Earth is in fact orbiting around the sun; and that the

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Earth is not flat (however, it is worth noting that the Flat Earth Society has about 34,000 followers on Facebook). The Trump Administration largely ignores modern Economics and certainly the international consensus in climate policy: an adequate policy requires global cooperation between large and small countries, and this is not what the president of a superpower should like to hear; it is certainly not the approach that President Trump, with his (in)famous “America First” policy and his emphasis on bilateralism—and his dislike of international organizations—wants to follow. This study argues that the US is indeed facing a structural populist phase, which can primarily be traced back to an enormous increase in economic inequality over decades and—this is surprising—a relative voter majority that holds the view that the unfair high levels of inequality in the US should be corrected by big companies, which is little more than wishful thinking. Although exit polls after the mid-term elections in 2018 indicated that health insurance and immigration were the two leading topics for US voters, this was a misleading picture. Broad concern about high inequality in the US indeed was not showing up as a topical political issue, but the main reason for this is not that there is no broad concern about this among large strata of society. The paradox is simply that US voters, to a large extent, do not consider inequality, and particularly income inequality, to be a challenge for the political system. From a European perspective, this is an unusual position since one would more often than not hold the view that high levels of inequality should be corrected by policymakers and economic policy intervention: adjustment in the economic framework—for example, creating stronger rules for competition—or policy intervention through tax policy or other measures would be considered by government. Can the US pick up some elements of the European social market economies? Will the EU be strong enough that EU27 ideas could inspire countries in Asia, North America and elsewhere? The US at the end of the second decade of the twenty-first century is far removed from such a European perspective, and it is difficult to imagine that market forces would lead to reduced economic inequality in the US. Rather, the economic dynamics, so the present study shows, will go on in a direction which will reinforce US inequality even further: the

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result will be broad frustration of the lower half of income earners and hence of a near majority of voters, and this, in turn, generates opportunities for future populist presidents who can make great promises and who have a talent for making bold announcements while not delivering much in the long run. The political economy of the digital “new world” is such that making generous promises in coarse and simple language and focusing on “headline-grabbing projects” is rather easy for political newcomers as the marginal cost of posting new political messages is extremely low in the Internet economy. More radical political headlines generate higher rankings, more attention and thus attract more followers in the digital social networks than sober solid scientific analysis. This, by the way, is partly also an explanation for the strange Brexit majority in the UK (about which I have written in the book An Accidental Brexit, 2017). As regards the US policy approach toward globalization, the rise of China has made this a less attractive opportunity, and this new ambiguity could affect international economic policy for many years to come. As regards Trump’s trade policy, the book presents new arguments on why the benefits for the US will be quite modest in the short term, namely, by looking at both trade and foreign direct investment aspects. A modified partial equilibrium approach already raises doubts about the often made claim that US import tariffs on Chinese goods generate major benefits, and a more refined new growth model—shown in the appendix of Part II—clearly suggests that the long-run effects of US import tariffs will be negative for the US; this appendix also suggests some new analytical capital market perspectives based on a Brexit-related capital market research project (which was sponsored by Deutsche Bundesbank, with the research primarily published in a special issue of the journal International Economics and Economic Policy, February 2019) which can easily be applied with its event methodology to Trump’s trade policy. Against all odds, Donald Trump, a New York businessman from the non-tradable sector, the construction industry, became the presidential candidate of the Republican Party in 2016, and in 2018, his view of the mid-term election results was that he had helped the party to a big political victory, an argument which is not fully convincing if one takes into account that the Democratic Party regained the majority in the House of

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Representatives, even though the Republicans had defended their majority in the Senate again in early November 2018. The Trump Administration wants a kind of unilateral leadership, partly based on America’s economic leading position amongst OECD countries, but the facts are not very favorable for the US. One key finding of the study presented here is that lifetime per capita consumption—net of health-care expenditures—in the US is not much different from that in France or Germany or indeed the UK. The strange inefficiencies of the US health-care system lead to a much higher share of national income devoted to health care in the US than in Western Europe; life expectancy is considerably lower in the US than in Western Europe, while the US infant mortality rate is higher (as will be shown). If the past 30  years would be the benchmark gap for the next 30 years, the hypothetical loss for the US in terms of the population that would have been achieved, with the lower German-French infant mortality figures, amounts to 50 million by about 2048 for the US. As regards the Trump Administration’s orientation for systemic reform, on the one hand, it seems that the US wants a protectionist and more nationalist policy, while on the other hand, the Trump Administration refuses to consider European countries with high per capita income as a model: it is obvious that the Council of Economic Advisers’ (2018) per capita consumption comparisons between the US and Nordic European countries are biased—the CEA claims, for example, an 18% US lead, while the effective lifetime consumption of people in Norway is actually slightly higher than in the US; moreover, the infant mortality rate in Norway and indeed in other Northern European countries and in Western EU countries is lower than in the US so that “utility spillovers” within young family suggests further advantages of European economic systems. These should be strong incentives for the US government and the US political system to consider learning more from Europe; but the spirit of the Trump Administration is not much in favor of learning. The EU has, of course, its own weak points, including Brexit. Comparing the US and Europe is always interesting, and a careful economic comparison reveals new insights. The difference between effective per capita income in the EU15 and the US is very small, and hence the US could learn as much from Europe as the EU could learn from the

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US, while both could almost always learn from Switzerland—and many other countries as well. The challenge of digital inequality, however, is a global one, and certainly one could try to find solutions for this problem. Europe itself is partly unstable, as radical political protests in France and other EU countries suggest. Moreover, populism is also visible in parts of the European Union. Europe—and above all the European Union—will change as a result of Brexit and Trump’s policies in the US. The entire world economy post-­ 2025 could be fundamentally changed: more prone to conflicts, more nationalistic, with structures similar to the rivalries of the great powers in the late 1800s. As regards my own personal research visits to the US, these date back to 1990. In 1990/91, I was enjoying a stay as McCloy Distinguished Research Fellow at the research institute of the AICGS/Johns Hopkins University—expansive Reagan years were a thing of the past, and President George Bush, Sr., was attempting to strengthen the American leadership role in the West. In doing so, he supported Germany on the road toward reunification of Germany and got involved in the First Gulf War, in which the US forces stopped before reaching Baghdad. Presidents Clinton, George Bush, Jr., and Obama followed—and Trump in 2017. In the US and Western Europe, many discussions took place in 2018 against the backdrop of the collapse of the New York investment bank Lehman Brothers on September 15, 2008: a decade after the outbreak of the transatlantic banking crisis; in Germany, this was three years after the wave of refugees, which Chancellor Merkel, rather incomprehensibly, so badly managed, and in the immediate aftermath of the “Chemnitz incidents” with right-wing, nationalist demonstrations—with the AfD’s regional party boss Björn Höcke leading the way. In The New York Times on September 11, 2018, the question was raised of the ability to learn from history. On that same day, the anniversary of the Islamist 9/11 attacks on the World Trade Center, I myself arrived in New  York on board a Lufthansa jet; eventually landing on the second attempt, after the first attempt was abandoned, we were later informed by the crew members that there had been another aircraft on the runway, as ours, trying to touch down. On the next day, I was to be a guest at the United Nations.

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Once again, I was in the US, where I have been a regular business ­visitor—primarily to Washington, DC,—since 1990, and a country whose friendly and welcoming people in many cities and states I have come to hold dear. Americans are helpful, child-friendly and for the most part optimistic, embodying the history of the US as a large, open and multicultural land. However, amongst the younger generations, there seems to be a doubt emerging, doubts about the opportunities available, tuition fees and campus accommodation being too expensive at good universities, while the starting salaries are often too low if one graduates from a less prestigious university. Over the years, I have had the pleasure of many research stays and given many presentations and lectures in the US, most often in Washington, DC,—where I spent a great deal of time at the AICGS/ Johns Hopkins University in the early 1990s. In the more than two decades since, I have remained in close contact with that institution; numerous presentations at the International Monetary Fund and the World Bank are also fondly remembered. My testimony at the US Senate in 1990 was a first test of my ability as a scientist to share my analysis with leading politicians in the US political system; I received the invitation shortly after participating in the well-known Friday lunch at the Brookings Institution where I had enjoyed the opportunity to meet colleagues and representatives from the field of US politics. The American political system is not always easy to understand, but it certainly has many strong elements and institutions and has inspired so many countries looking for needed reforms. For many decades, and indeed centuries, Europeans visiting the US have benefited greatly from the new transatlantic perspective as have Americans working in the UK or in continental Europe. The transatlantic dialogue between the US and Europe should be reinforced, and a trilateral partnership, involving Asian countries, including China, should be quite useful (personally, I remember with gratitude an invitation from the late Helmut Schmidt [former Chancellor of the Federal Republic of Germany] many years ago to participate in the Paris meeting of the InterAction Council—which is a group of elder statesmen discussing key topics in an informal way—the topic of the workshop was economic globalization, an issue which continues to interest me to this day).

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The aim of this book is to provide readers with, hopefully comprehensible, new insights into US policy approaches and the US economy under Trump—and the changing future US and global outlook. Moreover, key reasons for the electoral success of Trump will be presented, and the effects of Trump’s trade policy on the EU and the world economy as a whole will be discussed; as well as the possible reactions, and their effects on the US, of important trade partners such as China, EU, Germany, Canada, Mexico and others. The title of The Global Trump is chosen because the US as an economy is so big that every major economic policy decision of the Trump Administration—certainly in the field of trade, foreign direct investment and international organizations—will effect very many countries and indeed the world at large. One should also not overlook that US populism has a global outreach when it comes to the new efforts to export the ideology of Trumpism to Europe, Latin America and other regions of the global economy. The liberalization of societies and economies, the application of scientific discoveries and international cooperation—with the exception of the Cold War and the US-Soviet Union relationship—were three pillars of global prosperity for many decades since the end of the Second World War. With Donald Trump, this historic period of progress and well-being could be at an end, while the president develops a US version of Bonapartism and publically complains about having to cancel his planned military parade in Washington, DC, due to high costs. He may again travel to Paris on July 14 to view the military parade there with President Macron of France; one wonders if Trump is aware of the significance of the day, a day of remembrance as it is of the storming of the Bastille in Paris in 1789, an event which precipitated the French Revolution. A quick review of economic and political history certainly allows a certain relativization of Trumpism and the recent trade conflicts, which the Republican Party nominee for president, Donald Trump, has caused— even though the Republican Party has long stood for free trade and business. This book offers new explanations for US populism, and it suggests that there is in fact a structural challenge in the US that could destabilize the US, Europe and the world economy. Remedies suggested herein would not be easy to implement quickly in the US since the proposal to

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introduce institutional changes which would make the US look institutionally a bit more like Canada, France, Germany, Switzerland or Austria is an unfamiliar one with regard to traditional US discussions about reforms of the US. However, clear arguments can be understood by any reasonable reader and politician. There is no reason for the Western world to be pessimistic, but the derailing trajectory of Trumpism and Brexit is highly risky and should be corrected if the West wants to maintain its position in terms of global leadership into the near future. The increasing inequality in the US is partly stronger than in Europe because the US is a global leader in the digital economy. The new digital economy has some fields in which network effects and economies of scale plus product differentiation imply high barriers to entry and therefore generate high profit rates. Digitalization and the ongoing rise of China’s share in the world economy—going along with higher global exports—as well as the rising role of foreign direct investment (with low effective tax rates applied) will reinforce the inequality problem in the Western world and in newly industrializing countries. As long as a relative majority of US voters expects large companies to reduce inequality, which is the economic equivalent of science fiction, the problem of correcting the US welfare state—that is, more redistribution and a much more efficient health-care system—is not even on the political agenda in the US.  As long as this is the case, US populism and protectionism will be quite powerful and could politically infect Europe, Latin America and Asia: with the implication that international cooperation and multilateralism will be greatly weakened, and this, in turn, will undermine national, regional and global prosperity. This study explains these new risks and international dynamics in a rather non-technical way. One may point out that this scenario of global instability is not so unlikely; it should suffice to remember that most observers did not anticipate the pro-Brexit majority—a largely populist project with very high economic cost—or the victory of Donald Trump in the US presidential election of 2016. In a New International Political Economy perspective, it is fairly clear that US populism will have a tendency to be exported to Latin America, Asia, Europe and elsewhere. Another global aspect of the US Trumpism is that the US-China trade conflict undermines stability and income growth in two big economies, which implies both mutual repercussion

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effects and negative real income spillover effects to the Association of Southeast Asian Nations or ASEAN countries and the EU as well as other regional integration groups (for more of US-China tariffs and countervailing tariffs, see Appendix 5). Moreover, it is obvious that President Trump’s undermining of the World Trade Organization and other global institutions will impair globalization and hence worldwide trade and stability. Trump’s new populist economic policy will have major effects on the world economy and will necessarily have negative repercussion effects on the US. It is quite obvious that a purely economic analysis of Trumpism is inadequate and one could certainly benefit from also looking at the many contributions from the field of political science—a rather limited number of studies is quoted in this book as this is not the field of expertise of this author. As regards the politico-economic dynamics in the Western world, one may argue that the standard Olson argument that a small group can be organized much more easily than a large group—for example, consumers—is no longer broadly convincing in the digital age. Some new aspects will be considered. This book contains critical insights obtained at a UN Expert Group Meeting on inequality in New York in 2018, in which I have participated and in which I learned about the survey results on US society from Arvid Lindh and Leslie McCall. Intellectually, it would have been impossible for me to write this study without decades of international research and my long-term contacts with many US institutions and with colleagues in North America, Asia and Europe,; not to forget the insights I have obtained from many international economic research projects at the European Institute for International Economic Relations (EIIW). For animated exchanges and stirring discussions in the lead up to this book project, as well as her patience, I sincerely wish to thank my wife, Jola Welfens. I am also grateful for the discussions with colleagues and experts in my field. In particular, I am indebted to Leslie McCall, from the Stone Center on Socio-Economic Inequality at the City University of New York, as well as Jackson Janes, director of the AICGS/The Johns Hopkins University, Washington, DC. I would also like to extend my gratitude to colleagues for discussions on the occasion of the expert group meeting of the United Nations Department of Economic and Social

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Affairs on September 12–13, 2018, at the UN headquarters in New York. However, the responsibility for this study is all mine. I thank my team at the EIIW, in particular Christina Wiens, David Hanrahan, Tobias Zander, Fabian Baier, Tian Xiong, Vladimir Udalov and Kennet Stave, for their technical support, research assistance and editorial work. It is thanks to their efforts that this book can appear almost simultaneously in English, German and Chinese. My hope is that this analysis will help readers to understand the threat which is the disintegration of the West and also strengthen the openness of readers to reflect on the idea of a global Social Market Economy and on new reforms in the US and Europe. Wuppertal, North-Rhine Westphalia, Germany April 2019

Paul J. J. Welfens

Contents

Part I The Background to Trumpism and Economic Explanations   1 1 Introduction  3 References  17 2 Inequality, US Survey Results and Economic Analysis: The Case for Structural Trumpism 19 Tax Avoidance Problems, Foreign Direct Investment and G20   32 Income Dispersion  36 Economic Inequality Approach Versus Cultural Backlash Hypothesis  42 Relative Income Shares and Absolute Income Levels   46 US Survey of Consumer Finances: Analysis by Janet Yellen   49 Effective Real Per Capita Income and Health System Problems  53 What Drives Health-Care Costs in the US?   62 Council of Economic Advisers: Biased Per Capita Consumption Comparison of the US with Europe   64

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CEA Conjectures on a Comparison of Per Capita Income Between US and Nordic Countries   66 Measuring Economic Performance   73 Child Poverty in the US Versus Child Poverty in Switzerland   73 Policy Priorities in an Open Economy: The Case of Switzerland  74 What Causes Rising Inequality in OECD Countries?   75 US Policy Aspects   85 Populism and the Internet   91 Political Polarization  92 Two Destabilizing Mechanisms of the International Economy: Nationalism and Excessive Banking Deregulation   94 References  95 3 Protectionist US Policy and Expansionary Fiscal Policy: Ongoing Contradictions101 The Political Debate About Trade and Globalization  101 Trade, Protectionism and Production in a National and Global Perspective  106 Trump’s Fiscal Impulse  111 Inconsistent Views on the US International Trade Position  114 What Is the Problem with Globalization?  125 Globalization and Trade in an International Perspective  130 US Mid-term Elections 2018  132 Taking Back Control: Wishful Thinking and the International World  133 References 136

Part II Transatlantic Economic Relations 139 4 Trade, Employment and Transatlantic Policy Aspects141 The NAFTA Trade Conflict, New NAFTA and the US-­ China Tariff War in a Global Perspective  141 Skills and Employment Ratios in Industrialized Countries  144

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Heterogeneous Firms, Trade and Employment  144 The Size of the Transatlantic Effective Per Capita Income Gap  146 US Imports of EU Cars as a Threat to US Security?  149 New Trade Conflicts and the Reform of International Organizations 151 National Economic Policy and Globalization Plus China’s Growth 154 Common Populism Denominator in the USA and the EU?  159 Populism in Italy  162 Inequality Perception  163 Trumpism and the Conte Government in Italy  164 References 166 5 EU Reform Problems and the Rise of Populism in Europe167 Trumpism and Brexit  180 Brexit and Financial Market Perspectives  184 US Brexit Perspectives  185 Regulatory and Security Perspectives  190 References 193

Transatlantic Economic Relations 197 Appendix Part II: Adapted from Welfens (2018c), EIIW Discussion Paper No. 252   197 What Is Free Trade and How Will Protectionism Affect Income Per Capita in the Long Run?  203 References 214

Part III  US-Asian and Global Economic Perspectives 217 6 US-Asia-EU Perspectives219 The US-China Tariff Conflict and Its Impact on the EU27, the UK and Asia  219

xx Contents

US Protectionist Trade Policy Vis-à-Vis China  224 Is China a Challenge for the EU? Indeed, via a Destabilization of the US  232 APEC Challenges and Asian-EU Perspectives  234 References 240 7 China Risks and Challenges241 New Global Governance Issues  247 References 249

Part IV Policy Innovations and Systemic Reforms 251 8 Policy Conclusions for International Organizations253 Differentiated Economic Globalization  256 References 260 9 International Policy Conclusions261 Perspectives 265 Further Perspectives  270 Why Defending the Western Liberal Order Is Crucial—New Proposals 271 Policy Innovation for Unbiased Ratings  275 References 279 10 Canada, the US and Eurozone: Implications for US Reforms281 Some Further Conclusions  286 Transatlantic and Transpacific Health-Care Dialogue—and New Prospects  288 Selected EU Problems and OECD Perspectives  294 A View on the OECD  300 Improving the Digital Economy  301 Crucial New Prospects for Cooperation in Climate Policy  302

 Contents 

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Post-Trump Perspectives  304 References 305 Appendix307 References329 Index345

About the Author

Paul  J.  J.  Welfens is the President of the European Institute for International Economic Relations (EIIW), Chair for Macroeconomics and the Jean Monnet Chair for European Economic Integration at the University of Wuppertal and held the Alfred Grosser Professorship 2007/08 Sciences Po, Paris; IZA Research Fellow, Bonn, Senior Non-­ resident Research Fellow at AICGS/Johns Hopkins University, Washington, DC. He has testified before the US Senate, the German Parliament, the European Parliament, the ECB, the IMF and the UN. Internationally, he is one of the most published Western economists and stands for several analytical innovations in Open Economy Macroeconomics. The EIIW has conducted projects for several foundations, the European Commission, BP, Deutsche Telekom AG, AOL and NGOs. Paul Welfens has also benefited from previous funding from the John M. Olin Foundation, New York.

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List of Figures

Fig. 2.1 Top 1% vs. bottom 50% national income∗ share (market income), US, 1980–2016 37 Fig. 2.2 Top 1% vs. bottom 50% national income share (market income), Western Europe, 1980–2016∗37 Fig. 2.3 Structural populism problem in the US 41 Fig. 2.4 Real median income development in the US, 1984–2017 48 Fig. 2.5 US real median household income vs. US real GDP/total households, 1985–2017 49 Fig. 2.6 Earnings mobility across generations tends to be higher when income inequality is lower 52 Fig. 2.7 Infant mortality developments of the US, Germany and France (1960–2016)56 Fig. 2.8 Health insurance contribution incidence with (a) inelastic labor supply curve ( Ls )  vs. (b) elastic labor supply curve ( Ls ) . Demand curve of firms is Ld, L is employment 58 Fig. 2.9 Health-care expenditure as percentage of GDP/life expectancy, 201662 Fig. 2.10 Life expectancy in the US, Germany and France, 1960–2016  63 Fig. 2.11 Breakdown of national popular votes in Switzerland 2001–2017, by subject matter 75

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List of Figures

Fig. 2.12 (a) Annual growth rate of real output, 1980–2017; US, UK, Germany, France and Italy. (b) Real interest rate (long-term interest rate minus the growth rate of GDP deflator), 1980– 2017; US, UK, Germany, France and Italy. (c) Real GDP growth rate minus real interest rates, 2010–2017 77 82 Fig. 2.13 FDI true openness and transfers∗, selected countries, 2013 Fig. 2.14 Trade true openness and transfers, selected countries, 2013 82 Fig. 2.15 US unemployment rates∗ (total, Hispanic/Latino, black/ 86 African American), 1970–2018 112 Fig. 3.1 US, general government deficit-GDP ratio, 1970–2019 Fig. 3.2 (a) Contribution of fiscal policy to real GDP growth, US (2000–2018). (b) Components of fiscal policy contribution to real GDP growth 113 124 Fig. 3.3 Trump complaint box Fig. 3.4 Prospective US debt-GDP ratio of the US (OECD Simulations) 125 Fig. 4.1 Balance on the US current account by trade partner (in billions 143 of USD) Fig. 4.2 Share of working-age adults with low basic skills in the US and other selected OECD countries 145 146 Fig. 4.3 Prime age employment ratios in selected OECD countries 147 Fig. 4.4 US median household income and poverty rate Fig. 4.5 Median disposable income in the US and selected other OECD countries147 Fig. 4.6 Disposable real household per capita income in selected coun163 tries: US, UK, Germany, France, Italy Fig. A1 Export intensity in the US, the EU28, China and the world economy202 Fig. A2 Effects of higher foreign import tariff on the level of per capita 209 income and the long-run growth rate Fig. 6.1 (a) Asian century scenario, Asia GDP in 2050, $148 trillion. (b) Middle-­income trap scenario, Asia GDP in 2050, $61 trillion222 Fig. 6.2 Multimodal transportation routes from China to Europe  223 224 Fig. 6.3 Chinese-owned ports worldwide 231 Fig. 6.4 Global interdependency effects of a US protectionist policy Fig. 6.5 EU28 and ASEAN GDP per capita 2017, purchasing power parity (PPP), constant international dollar 236 237 Fig. 6.6 China’s top 30 import partners, 2016, US dollar

  List of Figures 

Fig. 6.7 Fig. 6.8 Fig. 6.9 Fig. 6.10 Fig. 6.11 Fig. 7.1 Fig. A1.1 Fig. B1.1 Fig. B1.2 Fig. H1.1 Fig. I1.1 Fig. J1.1 Fig. K1.1 Fig. K1.2

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China’s top 30 export destinations, 2016, US dollar 237 China’s exports to EU28 and ASEAN countries, 2016, US dollar238 China’s imports from EU28 and ASEAN countries, 2016, US dollar238 Exports of ASEAN countries to the EU28 and Germany, as percentage of GDP, 2011 239 Exports of EU countries to ASEAN, as percentage of GDP, 2011239 Nominal per capita income in Germany, Italy and the US plus selected Eastern European and ASEAN countries (purchasing power parity) 243 Top 10% national income shares in selected world regions and countries, 2016 308 Full price discrimination (based on ICT) 308 Taxation/Import tariff (The case of a big country) 309 US civilian population/total households 320 (a–i) Transfers and openness for selected countries (exports and imports; traditional and value-added), 2007, 2009 and 2011325 Optimum Tariff with outward foreign direct investment (profits from abroad are P1GF)327 China’s net overseas direct investment flow, US dollar 327 China’s outward foreign direct investment Stock, US dollar 328

List of Tables

Table 2.1

Comparison of EU and US inequality (Aggregate income inequalities, 2010) 24 Table 2.2 Annual holidays in selected OECD countries 53 Table 2.3 Relative effective disposable nominal income (y’; yearly data) of Germany + France relative to the US, 1995–2015 (US$ purchasing power parity (PPP)) 54 Table 2.4 Health-care expenditures relative to GDP and life expectancy: US, Canada, Western Europe 55 Table 2.5 Social spending excluding health-care spending, as percentage of GDP, 2016 61 Table 2.6 Actual individual per capita consumption at current price and purchasing power parity, US = 100 67 Table 2.7 Life expectancy, infant mortality, hours worked and unemployment in the US, Nordic countries, the UK, Germany and France, 1995, 2000, 2005, 2010, 2015, 2016 68 Table 2.8 Relative income inequality, 2015 71 Table 2.9a Composition of general government expenditure: 1999 (percentage of GDP) 79 Table 2.9b Composition of general government expenditure: 2011 80 Table 2.10 Standard deviations of selected economic indicators in the US and the European Union, 1960–2000 84 Table 3.1 Public expenditure on labor market programs (Training) in selected countries as percentage of GDP 128 xxix

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Table 4.1

List of Tables

Trade balance deficit positions of the US vis-à-vis major trading partners (as percentage of US GDP, average 2015– 2017)142 Table 4.2 GINI coefficients in the US and Germany in comparison with Brazil and other NICs (a) market income and (b) posttax income 158 Table 5.1 The transatlantic gross exports and value-added exports of the US and the EU28 190 Table 9.1 Financial product innovations in the EU (total), 2000– 2014272 Table 9.2 Selected dynamics in sustainability: EIIW-vita global sustainability indictor values for selected countries 277 Table E1.1 An overview of both the enacted and threatened tariffs of the US, EU and other countries 314 Table G1.1 Infant mortality rates and life expectancy at birth, OECD and selected countries 318

Part I The Background to Trumpism and Economic Explanations

1 Introduction

It is multilateralism which makes the weak strong, and the strong civilized —World Trade Organization Director-General Roberto Azevêdo, November 23, 2016

When historic globalization unfolded within a regime of very low tariffs and the gold standard in 1860–1914, many national governments argued that the state would collapse without the traditional high-tariff revenues and that the introduction of a broad income tax would be impossible. As it turned out, tariff income became largely irrelevant; the system of income taxation worked and became a reliable source of government revenues. Nascent international organizations were also partly effective; however, the International Court of Justice, established in 1899 with strong support from Russia in order to limit conventional armaments races, was not strong enough to avoid imperialist rivalries and World War I. It was only after World War II that the US helped to create several new international organizations, largely dominated by the US itself, which contributed to international cooperation and the policy monitoring of member countries and thus to more stability and prosperity worldwide. © The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6_1

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The International Monetary Fund (IMF) and the GATT (General Agreement on Tariffs and Trade)/World Trade Organization (WTO) are two key organizations in this respect, and since 1952 regional integration in Europe has also presented a model for multilateral cooperation in a regional context, supported by the US. Under President Trump, there is a new international policy paradigm as he is weakening international organizations and is no longer providing the traditional presidential support to the concept of European Union (EU) integration; instead, during his presidential election campaign, he has argued that Brexit is an extremely positive development and that more such cases could be expected. Unorthodox populist policy has taken a grip of the US in the form of Donald Trump. However, should one expect that there is indeed a structural US populism and what specific reasons have brought this about? In the US, the median household income has stagnated over many years (i.e. the income of that household which splits the income pyramid into 50% richer households and 50% poorer households—a useful measurement concept for the representative household). Modern globalization plus digitalization have brought an enormous income gain for the top 1% of income earners in the US; had the development in the US in this regard been as modest as the equivalent gain of the top 1% in France, there would probably have been no election victory for Trump in the presidential election of 2016. At the end of the first decade of the twenty-­ first century, the annual US median income was around $57,000 (a typical value over several years in the first decade of the twenty-first century) which implies that net of health-care expenditures, assumed to be 17% of income, the effective monthly income (“effective” here means net of health-care expenditures) of the average household is much smaller. This is not much more than a typical German or French household would have as an effective income; with health-care expenditure being only about 11% of income and vacations being more than twice as long as for US median income earners, Germany and France also have a life expectancy almost three years longer than that in the US. It is also noteworthy that the US infant mortality rate is above that of Western Europe, significantly so since 1985—another three decades of this transatlantic infant mortality rate gap implies that the US population would be 50 million

1 Introduction 

5

lower than it would have been if the US had an infant mortality rate equivalent to those in Western Europe (for Organisation for Economic Cooperation and Development (OECD) comparisons on infant mortality and life expectancy, see Appendix G). The first US president in whom I developed a particular interest was Thomas Jefferson. I recall a visit to the Jefferson homestead while I was in the US attending a Schumpeter Society Conference in Charlottesville (University of Virginia), and many years later, I received a German edition of Jefferson’s description of his Rhine tour in 1788. At the time, Jefferson was the US ambassador in Paris and met up with John Adams (who would later also go on to become president) in Amsterdam. Adams was on a farewell tour in The Hague and traveling through the Netherlands, where he was negotiating the US national debt with Dutch bankers—much to the reassurance of Jefferson, who would later become third president of the US. Jefferson was a practical man who wrote many observations related to the growing of vines (eager to learn from European viticulturists and winemakers, later bringing grapes to the US), building houses, the scope of poverty and so on, all observed during his journey through Holland and along the river Rhine (and also to Frankfurt/Main, Mannheim, Strasbourg and then back to Paris). When leaving Holland and journeying further to the northern parts of Germany— then part of Prussia (Germany was established only in 1871)—Jefferson (1788) noted (sic): “The transition from ease and opulence to extreme poverty is remarkeable on crossing the line between the Dutch and Prussian territory. The soil and climate are the same. The governments alone differ. With the poverty, the fear also of slaves is visible in the faces of the Prussian subjects. There is an improvement however in the physiognomy, especially could it be a little brightened up. The road leads generally over the hills, but sometimes thro’ skirts of the plains of the Rhine. These are always extensive and good. They want manure, being visibly worn down. The hills are almost always sandy, barren, uncultivated, and insusceptible of culture, covered with broom and moss. Here and there a little indifferent forest, which is sometimes of beach. The plains are principally in corn, some grass and willow. There are no chateaux, nor houses that bespeak the existence even of a middle class. Universal and equal poverty overspreads the whole. In the villages too, which seem to be falling down, the overproportion of women is evident. The cultivators seem to live on their farms. The farmhouses are of mud, the better sort of brick, all covered with

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thatch. Cleves is little more than a village. If there are shops or magazines of merchandize in it, they shew little. Here and there at a window some small articles are hung up within the glass.” However, he also noted how intolerant and populist the majority of influential people in the city of Cologne—later part of Germany—were at that time: “Cologne is a sovereign city, having no territory out of it’s walls. It contains about 60.000. inhabitants; appears to have much commerce, and to abound with poor. It’s commerce is principally in the hands of protestants, of whom there are about 60. houses in the city. They are extremely restricted in their operations, and otherwise oppressed in every form by the government which is catholic, and excessively intolerant. Their Senate some time ago, by a majority of 22. to 18. allowed them to have a church: but it is believed this privilege will be revoked. There are about 250. catholic churches in the city” (Jefferson 1788). As is well known, poverty and religious intolerance in many European countries were key drivers of European emigration to the US in the nineteenth century. The seventh man to hold the office of the president, Andrew Jackson, was a populist president, who rose to power from outside the East Coast elite and who was reelected to office. Amongst the 45 presidents to date, one could broadly identify five who could generally be regarded as populists. However, with President Trump, a significant and lasting impact on the presidency could result. How open-minded is this president, and how much do instability and efficiency losses contribute to the changes in terms of top staff positions? The frequent changes in personnel seem to signal either an inability to choose the right person from the beginning or a general underestimation of how much frequent change in top government positions undermines the credibility of the US Administration. As the US is a big economy, which represents about one-fifth of world income and the biggest source country of outward foreign direct investment, as well as being one of the biggest trading nations on the globe plus the leading country in North Atlantic Treaty Organization (NATO), it is clear that major policy changes in the US will have a global impact. This will hold true all the more since the US has always been active in exporting its ideology, ever since 1776; so, if populism and a rather autocratic presidential style would become the “new standard” in the US, it would have a global economic and political impact with very many crucial aspects of which the economic analysis

1 Introduction 

7

could naturally cover only certain key parts. Complementary analysis from the field of political science would be needed for many topics and issues; political science offers many crucial insights into Trumpism (e.g. Rojecki 2016; Lieberman et al. 2017; Sides et al. 2018; Morris 2019; on immigration and identity issues, see Akerlof and Kranton 2010). The Trump approach to the US presidency is certainly also new in the sense that he has a very poor understanding of the key role the US government institutions play in terms of private sector dynamics, and while this seems to be a rather technical aspect, it indeed could have high cost for the US and the world. When leading civil servants from the Obama Administration were ready to welcome the new incoming staff from the Trump Administration, there was often nobody showing up in January 2017, so that a critical knowledge gap exists in many ministries. The style of Trump is strange in many respects, and his inclination to push for his US-Mexico border wall through a long government shutdown is just one other aspect. As regards economic policy, he has few advisors who have supported him for more than 18 months. Among the few leading economists is the head of the US Council of Economic Advisers, Kevin Hassett. Hassett, when was asked in a Senate hearing in March 2018 about his view on the US import tariffs in the steel and aluminum sectors, answered that he could not give his view as the tariffs had been imposed for national security reasons. That is the answer of an economist who obviously has doubts about the economic logic of such import tariffs. There is a broader view in the Trump Administration, based on partial equilibrium analysis, that high import tariffs imposed on China will generate considerable benefits for the US, but the partial equilibrium analysis is flawed once foreign direct investment is included, and a simple growth model with trade and foreign direct investment makes clear quickly that one should not expect long-run benefits from US import tariffs for the US—such a model and the enhanced partial equilibrium model are shown in the appendix to Part II of the book. President Trump tried to win the 2016 presidential campaign by focusing on the one hand on the wealthy voters who hoped for lower tax rates and deregulation, while on the other hand focusing on the so-called forgotten men and women which was his short-hand description for the workers and relatively poor strata. This effective two-pronged approach

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ultimately gave him the majority he needed in the Electoral College to become the president. The traditional lead of the Democratic Party among the relatively poor strata was lost in 2016. Only two years later did the 2018 mid-term elections bring a clear victory for the Democrats to the extent that one considers the national popular vote. The Democrats achieved a 7% lead over the Republican Party in terms of the votes for the US House of Representatives. However, the US political system does not necessarily give the winner of the popular vote the keys to the White House, as became obvious in 2016 (and as was also the case in the previous presidential competition between George Bush Jr. and Al Gore in 2000). The US mid-term elections in late 2018 might be interpreted as a signal that a populist US president with a high-risk political agenda would not easily win the next presidential election. However, even if President Trump would lose the next election, there could soon be new momentum for voting for a similar populist US presidential candidate. In the Internet age—with millions of pieces of unrated information circulating daily and news platforms that often present fake news and disinformation or conspiracy theories—there are new opportunities for radical political candidates. One certainly also has to consider the fact that the post-September 11 (2001) US is a politically more nervous country than before. This holds also, even more so, for the immediate years after the massive Transatlantic Banking Crisis. The crisis has clearly undermined the credibility of the ruling elites both in the US and elsewhere—such as the UK. The fact that the Queen of England during a visit to the London School of Economics in 2009 would ask why nobody saw the crisis coming was a signal of mistrust to both economists and the modern economic system’s leaders in top companies. The Queen was relaying a question which was being asked by ordinary voters across the UK (and further afield) and no real answer was given. In the US, a majority of voters raised similar doubts about the ultimate wisdom of the class of leading bankers in big US banks. Without the systemic competition from socialist countries in Eastern Europe—which ended in 1990—Western capitalist systems became more and more pro-market, and regulations were weakened beyond a reasonable limit. Western countries, with the exception of Canada, embraced a broad deregulation of banks and financial

1 Introduction 

9

markets in the 1990s, and it all ended in a massive banking crisis in 2008 when Lehman Brothers investment bank went bankrupt and brought the US and the UK economies close to a full meltdown—a nightmare scenario which was avoided by President George Bush’s saving of the biggest US insurance company, AIG, and a series of rescuing measures aimed at propping up large banks (in the UK and other EU countries, plus Switzerland, with broad rescue measures being adopted which came with a high price tag of billions of pounds/euros/Swiss francs, while voters heard that for other important budget lines no money was available). President Obama had to clean up the economic mess partly created by the Bush Jr. Administration. The second Obama Administration has tried to introduce a broader health-care system, but the reform had its problems and the rise of insurance contributions associated with the Obama reforms obviously helped Trump to win a majority in 2016. However, health care was also a topic in the mid-term elections in 2018 in the US, and many voters understood that Trump’s attempt to push back “Obamacare” would take away insurance against what is the biggest risk for the average household to suddenly become poor, namely, the case of serious illness in a family without insurance. Although Hillary Clinton won the popular vote, the Democratic Party was ill-prepared for the presidential election in late 2016. The wily Donald Trump, who had shrewdly outmaneuvered rivals to receive the nomination of the Republican Party, emerged as the unexpected victor in the Electoral College and thus became the 45th President of the US—a man with no political experience, but a businessman with a proven talent for communication. However, as time passed, it became glaringly obvious that the administration which President Trump established was strangely incompetent. The answer is a clear yes, and the contradictory beliefs in question relate to the misguided expectations of a majority of US voters vis-à-vis key issues. Meanwhile, President Trump has been doing his best to damage the preexisting political system in the US, and if he is successful, the West would be deprived of a rational leading power in the years to come. The transformative process of digitalization—in which the US is a global leader—is reinforcing globalization as transaction costs are declining and international network effects are crucial in some fields. The ­digital

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world economy has brought an unprecedented level of digital market concentration, and most of the top 10 leading stock companies in the US in 2018 were from the digital sector and the sector of information and communication technology. For political competition, leadership in digital communication has also become decisive, and Donald Trump indeed has been able to bypass much of the traditional media in his presidential campaign of 2016, and later, as the 45th president, he was a leader in twitter communication, at least a leader in terms of quantitative communication. The quality of information and news is a rather unknown dimension in the digital world, and hence a certain level of confusion in the societies of the Western world has become a temporary characteristic after 2000—with a peak around 2008 when the Transatlantic Banking Crisis emerged, itself largely based on a poor quality of information, namely, rating signals from the so-called leading rating agencies. The Banking Crisis undermined the confidence of voters in the US, the UK and other Western countries in the wisdom and reliability of the political elite which had allowed regulations to become so weak that the Banking Crisis could almost bring about the implosion of the Western world (despite its victory in the Cold War two decades before) in 2008. The enormously rising income differences in the three decades after 1985, largely in favor of leading bankers and the top managers of financial firms, signaled a dramatic change in relative productivity and scarcity, respectively, that could seem rather implausible not only to experts but to most ordinary citizens as well. The response of central banks in the US, the UK, the Eurozone and Switzerland has been quantitative easing— that is, central banks buying government bonds and other assets in large quantities; all this in a situation where central banks’ interest rates were at the lower zero bound. As a side effect of quantitative easing, which supported banks’ and firms’ willingness to invest and to take risk, inequality in Western countries has increased: the owners of many firms enjoyed considerable capital gains, and replacing high-yield corporate bonds through low interest rate loans or corporate bonds (an opportunity created by quantitative easing) contributed further to economic inequality in Western societies. However, rising inequality had been a challenging trend in the US since at least the 1980s when Ronald Reagan slashed income tax rates, particularly the top marginal income tax rates, in the US.

1 Introduction 

11

The election of Trump as the 45th president of the US—a power shift toward populism which was largely missed by the media—seemed difficult to rationalize. However, a closer examination and consideration of the opinions of American voters reveals that the reasons behind Trump’s victory are more obvious than first thought: to some extent, voters are desperately seeking solutions to the issue of growing economic inequality—since the 1980s—but the solutions proffered to date have proven ineffective, and thus the ever-growing frustration amongst the disadvantaged people of the society is being channeled toward political majorities for anti-elite candidates (in the 1960s, President Johnson adopted a program—the Great Society—to reduce income inequality; see Atkinson 2015). This effect was less visible during the 1990s when high levels of economic growth brought real income gains for the lower strata of society. The resulting problems for the US economy and society will not easily be corrected, and the frustration of poorer voters is substantial. The contradictions between expectations and reality for the majority of the electorate are enormous. The economic dynamics mean that in the medium term, the income share of the poorer 50% of households will fall even further, and the preferred corrective measure, according to surveys in the US, to overcoming this challenge of inequality is not a workable option; that large companies would voluntarily reduce the salaries of executives and top managers while raising the wages of unskilled lower earners is not a realistic scenario. Disenchanted and frustrated voters are the grassroots of every populist movement, whether in the US or in Italy in 2018, or in Italy under Benito Mussolini. Furthermore, populist governance, characterized by the interplay of emotionalized policy and misplaced self-confidence in terms of problem-solving, is part of the new top-down contradictory approach, namely, between political promises and reality. This basic truth can be disguised for some time with ideological fanfare—including in the digital sphere. It is impossible to ignore the fact that the presentation, perception and influencing of reality have, from the perspective of politics, changed in the US since 2000. The Internet offers a platform for absurd views and deliberate campaigns of lies which can influence policy as exercised in positions of power—what would not even have been printed as a letter to the editor in a local newspaper during the 1980s under President Reagan,

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can now result in millions of “likes” and followers on Facebook and other similar sites. If President Trump should hinder the globalization of the US economy with his protectionist approach, then he will also be hindering the economic catching-up process of poorer countries (for more on the positive aspects of globalization see Bhagwati 2004). The migration pressures from the Global South toward the Global North would increase—preparing the way for even further populist movements, which stress questions of identity, nationality and culture, resulting in calls for anti-immigration policies. This often occurs on the basis of the belief that immigrants are an economic burden on the state and thus cost the taxpayers a lot of money—a charge which is often made in the US, UK and some other EU countries, which, however, according to the OECD, does not apply to most industrialized countries (with the notable exceptions of Germany, France, Ireland and Slovakia). Although the US electorate broadly perceives growing inequality as unfair, surveys have shown that a majority of US voters have no realistic idea or concept of how this development could be effectively mitigated. At the same time, the forces of globalization and digitalization, as well as the export dynamics of China, are resulting in an ever worsening relative income position of unskilled laborers—even the majority of voters—in the US. That President Trump, with his reforms to Obama era health policies, has removed from millions of people a crucial safety net against a fall into poverty is a paradox of the power plays under the Trump Administration. Interestingly, Trump has also followed an anti-­ immigration agenda, which is rather unusual for a US president, which he has utilized to reduce the already small US social system. Beyond the field of tax policy, Trump has little economic competence at his disposal within the current administration, for which there is good reason. The level of contradiction in Trump’s economic policy is high. By 2025, the income share of the lower 50% of households in the US could, at 10%, have been halved compared to its level in 1980, and the income disparities will continue to grow. Not least, because the power of unions has fallen in the US in parallel to the ever shrinking share of industry in US gross domestic product and because the recipients of capital income from abroad are accruing higher overall returns (after tax)—if the tendency in

1 Introduction 

13

the US follows that of Switzerland, a leading globalized economy, which seems a plausible assumption. In any case, in Switzerland, it is the case that the strong rise in the post-tax incomes of the top 1% can be traced back to one common factor—increasing income from abroad, where capital income has been taxed relatively leniently. The low-tax US is very similar to Switzerland; as is the case in the Alpine country, the US attracts more profits from abroad than flow from the US to foreign countries. Donald Trump obviously employed a very convincing populist message in the presidential campaign of 2016: he repeated his concern for the average people and blue collar workers, the “forgotten men and women”, and promised them in some cases their old jobs back and in other cases to create millions of new jobs. He promised to increase the US’ standing and influence on the world stage and to reduce the number of immigrants—immigrants which he said were costing Americans their jobs. At the same time, millions of immigrants (according to Trump in his Pheonix, Arizona, “immigration” speech) were abusing the US social system—which Trump has used as an argument against social policies. Moreover, Trump offered the Republican Party, with its traditional skepticism vis-à-vis big government, a carrot in the form of promises of deregulation and the enabling of new business models. Trump also proposed a policy of tax reductions, from which it is the top income earners who will profit most in the long term. It is beyond doubt that Trump’s rhetoric was comforting to people from lower socio-economic backgrounds; however, Trump’s economic policies will only serve to create a fleeting respite, and the major risks faced by the lower half of the US income pyramid will not be permanently alleviated. On the contrary, with the traditionally pro-free trade Republican Party turning into a driving force behind a global trade war, an ideological identity crisis lies ahead. Trump has implemented protectionist trade measures against Mexico, Canada, China, the EU, Japan and Korea: import tariffs targeting NATO allies were imposed, with Trump citing reasons of national security in the case of aluminum and steel, while other tariffs and threats of tariffs have followed. With regard to China, a bilateral escalation of tariffs was visible in 2018. This trade protectionist policy is not sustainable over a considerable period of time. It will only serve

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to damage the economies of the US, Europe and indeed the world ­economy. Since the US made clear it would no longer support European integration, marking a departure from over six decades of traditional backing, and with Trump pushing a bilateral EU-destabilizing approach of dealing with countries individually and trying to suppress the role of other international organizations, a new competition between economic systems has emerged: the free market economy of the US against the “Social Market Economy” of the EU—and against China and its autocratic government which promotes its system of a hybrid state-private market economy. If Trump should destroy multilateralism and the role of international organizations in critical fields, for example, the World Trade Organization, then the number of conflicts resulting from disorderly and unregulated trade, investment and migration will rise—backsliding toward a world economy more reminiscent of the nineteenth century. With Brexit, the UK, having exited the European Union, will seek an even closer “special relationship” with the US, giving US populists new avenues to export their nationalist and xenophobic policy agendas to Europe. In parts of Europe and Asia, including some ASEAN (Association of Southeast Asian Nations) countries, governments are confronted with increasing levels of doubt in the benefits of regional integration and multilateralism, respectively; above all, under pressure to distance themselves from such approaches from the US and President Trump. Thus, it is high time for the EU27 to become engaged on a global level to promote both integration and multilateralism. It remains to be seen if the European Union can succeed in reforming the European Social Market Economy, turning it into an economic system that is perceived as an attractive model—with global influence. Should the US remain under the spell of right-wing populism for many years to come, it would fall on EU countries to become the standard bearers for liberalism, the rule of law and respect for constitutionalism; this would be a new and difficult role for the EU to adopt, as such a role would require broad and expedited reforms and must also be associated with a claim to be the defender of the multilateralist system. The latter could only be realized if the EU could convince China, above all, to join forces. That would mean a chance to

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save the extensive and largely functioning system of international organizations. After some time, the US, following reforms of its own, would once again take up its position in the global system. In this outlook, the new phase of populist politics in the US is regarded as at least a medium-­ term phenomenon—possible to overhaul under a new US president— thus it would indeed be sensible for the EU to essentially undertake a strategic reorientation in the fields of foreign and economic policy. The process, however, would certainly be a difficult one. Without sound reforms and a strengthened EU-Asia cooperation, the EU is unlikely to maintain the independence and international influence it currently enjoys in the longer term. Moreover, it is more crucial than ever before to be aware of the examples of significant success which have been achieved in the area of regional integration in Europe (EU), South America (Mercosur), Southeast Asia (ASEAN) and Africa (ECOWAS). Trumpism, as a new US variant of populism, will survive for many years even after Trump leaves office. The social and economic structures, which Trumpism has produced, will remain in place unchanged. This is a problem for Western Europe in the medium term, as should transatlantic economic and political conflicts occur again and again, then the pressure on the EU/Eurozone to look toward Asia—and in particular to ASEAN and China—for reliable partners will grow. ASEAN, a community of countries comprising over 600 million inhabitants and in which the EU is the leader in terms of foreign investment, will, as a result of US protectionism, rapidly come under the influence of Chinese investors. In an example of “tariff-jumping”, China will seek to use the ASEAN countries as a base from which to export products to the US in order to avoid measures targeting goods produced in China. This will reduce China’s trade surplus with the US, but America’s “China problem” will remain; the only effect will be a loss of American power and influence in the ASEAN member states. Considering the question of overcoming US populism results in three possibilities for containment: first, from within the US, through internal reforms and changes in the political system; second, from outside the US, spurred by a new transatlantic competition between systems for which the EU is largely unprepared, and in which the EU countries would

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increasingly seek to export the Social Market Economy globally as a model worthy of adoption in countries worldwide; third, and finally, from a type of global alliance in defense of multilateralism—even though the largest economic partner, China, has little experience to date in this area. Thus far, China has not successfully formulated or presented its own design ideas for multilateralism during the decade since China acceded to the World Trade Organization. The longer the American flirtation with populism as a nationalist and protectionist project lasts, the stronger the political currents striving for the diffusion of the ideology across the globe will be; and there the prosperity and stability of the countries in “old” and “new” Europe alike, with their own experiences of both old and new nationalism, will be endangered. Germany, with its own past demons, could become a weak point in Western Europe: thus stopping the rise of the populist, right-wing Alternative für Deutschland (AfD) gains a national as well as international importance. From the point of view of the EU, it is both momentous and regrettable that the US would appear to have entered a phase of considerable internal contradiction. Right-wing and nationalist political parties, as well as US interest groups, in Europe—but also in Asia and Central and South America—will seek to gain in political influence with support from the US. In Germany, a differentiated approach on the part of industry, which is reminiscent of situation in the early 1930s, is clearly visible: some multinational firms, for example, Siemens or Bosch, defend globalization, while executives have spoken out against xenophobia and right-­ wing populism. This does not rule out, however, that these or other firms themselves could at some point seek to benefit from playing a nationalist card. The US messengers, who want to spread their creed in Europe, are in part politically radical and are financially supported from the ideological Trump camp. The old world economy is being confronted with massive change for the first time since the end of the Soviet Union in 1991. To understand the dynamics of this change and to determine measures aimed at avoiding a global shift to the political right—and with it an international return to the late nineteenth century—is a crucial aspect of this analysis.

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References Akerlof, G., & Kranton, R. (2010). Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being. Princeton: Princeton University Press. Atkinson, A. (2015). Inequality—What can be Done? Cambridge, MA: Harvard University Press. Bhagwati, J. (2004). In Defense of Globalization. New  York, NY: Oxford University Press. Jefferson, T. (1788). Notes of a Tour through Holland and the Rhine Valley, 3 March–23 April 1788, US National Archives. Retrieved from https://founders.archives.gov/documents/Jefferson/01-13-02-0003#TSJN-01-13-0003fn-0009-ptr. Lieberman, R., Mettler, S., Pepinsky, T. B., Roberts, K. M., & Valelly, R. (2017, August 29). Trumpism and American Democracy: History, Comparison, and the Predicament of Liberal Democracy in the United States. Working Paper, https://doi.org/10.2139/ssrn.3028990. Morris, E. K. (2019). Inversion, Paradox, and Liberal Disintegration: Towards a Conceptual Framework of Trumpism. New Political Science, 41(1), 17–35. Rojecki, A. (2016). Trumpism and the American Politics of Insecurity. The Washington Quarterly, 39(4), 65–81. Sides, J., Tesler, M., & Vavreck, L. (2018). Identity Crisis: The 2016 Presidential Campaign and the Battle for the Meaning of America. Princeton: Princeton University Press.

2 Inequality, US Survey Results and Economic Analysis: The Case for Structural Trumpism

This study on The Global Trump presents a new analytical look at the reasons behind the election of Donald Trump as president of the US in late 2016, and at the first two years of the Trump presidency that has brought so many new policy approaches and populist perceptions that have shaken the traditional US political system and the whole world economy. While in 1991 the Western market economies—also largely representing democracy and the rule of law (at the international layer via multilateral international organizations)—looked like the big winners of the Cold War and of the rivalry between market economies and socialist command economies, the year 2016 stands for a backlash against the Western world. In the UK, a majority of voters rather surprisingly voted to leave the European Union (EU) (although it did not come as much of a surprise personally as I followed the arguments of the Financial Times journalist Gideon Rachman and formed my own arguments which raised doubts about part of the US and UK elites after the banking crisis of 2007–2009 (Rachman 2016; Welfens 2016)). In the US, the Republican candidate for the presidency, Donald Trump, achieved victory against the politically more experienced Hillary Clinton, the nominee of the Democratic Party in the presidential campaign, a result that again was a © The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6_2

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surprise for most of the media in the US. The changes in policy adopted by the Trump Administration—which has experienced high levels of instability in terms of the secretaries and other officials chosen for the team by the president—were significant with regard to foreign policy, trade policy and fiscal policy, to name just the most critical fields. The Trump Administration took the rather strange view that the US economy was in a weak position in 2016 and that the US had entered unfair agreements following many of the international trade negotiations it had participated in over the years: the US would instead adopt a new bilateral policy approach and thus break with six decades of international cooperation and multilateralism—here referring to the crucial role of international organizations. These new policy approaches brought the Trump Administration into conflict with major allies, ranging from Canada to Mexico, Germany plus France, the Republic of Korea, Japan and Turkey plus China. If the analysis presented is correct, based on new US survey material and the combination of my own knowledge of International Economics, supported by dozens of academic papers and books plus digital information sources and data, the conclusions for the US and the world economy are rather dramatic: • The new phase of US populism is not just a transitory Trumpism phenomenon, but a more deep-rooted structural challenge which cannot be overcome without making considerable systemic adjustments to the US politico-economic system: there are reform requirements that are not impossible to adopt, but an easy project looks different and the same could be said about the EU. The US populism of the Trump brand stands for wishful thinking, illusory political promises in many fields and a sudden weakening of the US scientific community whose influence on politics has been much reduced by the expansion of the Internet. • The EU has been absorbed for more than two years by the Brexit majority of June 23, 2016, the day of the EU referendum in the UK. While in a referendum in 1975 UK voters showed a strong two-­ third majority to remain part of the European integration project it had joined, the 2016 British referendum brought a 51.9% pro-leave (i.e. pro-Brexit) majority: leaving the EU seemed to have reached a

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majority (for arguments that the referendum was disorderly, see Welfens 2017b; the normal result based on a standard UK popularity function would have been 52.1% for Remain). The EU countries in turn largely pretend to cooperate in a broad standard way with US President Trump, but the transatlantic contradictions that have emerged are rather serious and clearly visible; and even if the EU28 would greatly wish to ignore the direct transatlantic politico-economic tensions, in Europe, one could not overlook that the Sino-US trade conflict, largely shaped by the Trump Administration, has such broad international economic spillover effects that EU28 countries will face massive new challenges from both Washington, DC, and President Trump, respectively. The twin-pronged challenge for the US in the medium term is to learn more from EU countries in the field of the Social Market Economy in the future, while the EU could and should learn from the US in other crucial fields—for example, when it comes to venture capitalism. The two pillars of the Western system became unstable in 2016/17, with the US and the UK, that is the first and second leading Western globalized powers, the UK dubbed second here as the previous leader of globalization in a historical context, leaving the Western orbit of reliable market and rule of law economies. The international rule of law is clearly weakened by both Brexit and the Trump presidency. Could the traditional Western leaders, the degree of politico-economic stability and the trust of both industrialized countries and developing countries in the US (and the UK) soon be restored? There is no easy answer, except that once the US or the UK has left major international organizations, for whose competence and influence both countries have been quite important, a new fragile global architecture might emerge—an institutional setting that is very different from what the Western world has held dear over seven decades of postwar international cooperation under various US presidents. It is clear that China is the new rising global economic star. Although it stands for only about one-third of US per capita income, it has already slightly exceeded the US national income in purchasing power parity in 2017, and one should anticipate that China should be able to achieve a two-third income position vis-à-vis the US by around 2030 or 2035. The global influence of China has increased,

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while the normally to be expected joint US-EU reaction is not to be seen. At the same time, while Donald Trump has developed a strong digital communication format on Twitter platform, however, in usual circumstances one would have expected a joint US-EU economic cooperation with regard to China and Asia, respectively. With Brexit and Trump, a joint EU28-US cooperation with respect to China is rather unlikely. The US president himself sends many doubtful communication signals: a project of the Washington Post (2019) has focused on the lies and incorrect conjectures of President Trump with a database of the daily count of false and misleading claims. What kind of a new age of Western confusion is this, and how serious could the implications be in the future for Europe, North America, Asia and other regions of the world economy? One should not rule out that transatlantic cooperation, which has been greatly weakened under President Trump, could be reinforced within a new concept. EU social market economies would find it easier to cooperate with the US if the institutional differences between the two would diminish. From a European perspective, this should mean that the US would become more similar to key EU countries in the field of social policy; this could indeed happen once the US political system would start to look more carefully into the advantages for the US of a more modern social security system that includes rather broad health insurance coverage and better health-care services, as well as many (European standard) routine check-ups for pregnant women and their unborn babies. A lower infant mortality rate in the US would raise its population by about 50 million within 60 years provided that the US figure for infant mortality achieves the low levels of Germany/France/UK. The current system in the US leaves many pregnant women from relatively poor families without routine prenatal check-ups, and this contributes to rather high US infant mortality numbers. Many EU member countries have useful institutional arrangements that would be useful for the US, possibly after some modification; at the same time, in many fields, EU could learn from the US. From an EU perspective, there is an interesting and unique option to reinforce economic and political cooperation with China—the land-based logistical link between the EU and China offers unique opportunities for new European-Sino just-in-time delivery cooperation which is useful for many industries, including the automotive sector.

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That the EU should also try to export the Social Market Economy more toward Association of Southeast Asian Nations (or ASEAN) countries and other countries in Asia is obvious. This in turn could encourage the US to consider more carefully European reform elements in the US. The study also raises the question of why the US does not eliminate the most important poverty risks facing the country, namely, the chance of falling ill without health insurance, and why the US political debate does not consider the rich variety of good health insurance systems. Examples of such systems range from those in EU countries to Switzerland and Norway plus Iceland in Europe. Western EU countries (EU15) spend much less on health care—relative to national income—than the US, and all have higher life expectancy than the US, so that it seems natural to study the European models of health insurance. This study also makes a range of reform proposals for both the EU and Europe more broadly, as well as for China. As China is still engaged in the catching-up process, it will still have to consider in what fields it should adopt quasi-European rather than North American policy approaches, while each “country” (here also referring to the EU) in this triad of economic powers could also learn from the other two giants. This, however, does not rule out that in some cases the best model to consider would be, for example, that of Switzerland or Singapore. Globalization can be sustainable only if one is willing to take a serious approach to organizing global benchmarking. The US Gini coefficient—as an indicator of inequality—was higher than that of the EU in 2010 (EU27 is EU28 without Croatia—which acceded to the EU in 2013)—see Table 2.1. S10 refers to the share of the top 10% in total income, while S1 refers to the share of the bottom 10% or decile in terms of income—the share ratio is an indicator of income inequality, and one can see that the ratio is higher for the US than for the EU. The P90:P10 ratio, on the other hand, shows the ratio of the incomes found at the lower boundary level or cut-off point of the top decile on the one hand (i.e. the 90th percentile) and the upper boundary of the bottom decile on the other (i.e. 10th percentile). The household share under the heading “Poverty” was about 23% in the EU27, while it was 33% in the US. Measured in terms of the mean poverty gap (PPP = purchasing power parity), the EU27 and the US had the same value.

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Table 2.1  Comparison of EU and US inequality (Aggregate incomea inequalities, 2010) Gini coefficient S10:S1 ratio of income shares S10 income share (%) Gross incomes (%) P90:P10 ratio of decile cut-offs Poverty  •  Household share (%)  •  Income share (%)

EU27 (PPPb)

Exchange rate

US $

0.303 13.8 25.9 31.0 5.5

0.305 22.8 26.8 32.2 8.3

0.380 15.9

23.2 7.5

26.9 7.5

32.9 7.9

46.4 6.1

Source: Salverda 2015: EU Policy Making and Growing Inequalities, DG ECFIN Discussion Paper 008, 2015; Fellowship Initiative 2014–2015?, Brussels, Table 3, p. 22 a Income refers to net-equivalized incomes unless otherwise specified b PPP refers to purchasing power parity

Under the Obama Administration, considerable government efforts were made to overcome the banking crisis and also to reduce economic inequality while, at the same time, reducing, for more Americans, the risk of poverty through a lack of health insurance. The US Council of Economic Advisers (2017) wrote in the Economic Report of the President (p.  181, note ACA  =  Affordable Care Act in the Obama health-care reform of 2010): “The impact of fiscal policies enacted during the Obama Administration on inequality varies by measure, ranging from a 3-­percent reduction in the Gini index to a more than 20-percent reduction in the ratio of average incomes in the top 1 percent to the bottom 20 percent., but all measure show a meaningful reduction in inequality.” The US Council of Economic Advisers emphasized (p.  181) that tax policy changes since 2009 and tax-related coverage provisions of the ACA should increase the average tax rate for the top 0.1% by 7 percentage points in 2017, namely, from 31% to 38%. For families in the top 1% but not in the top 0.1% at the very top of the income pyramid, these changes should increase the average tax rates by 4 percentage points. The income share of the top 1% in the income pyramid should reduce by 1.2 percentage points in 2017 (7%), namely, from 16.6% to 15.4%. The Council also points out that according to CBO figures, the share of ­after-­tax income obtained by the bottom quintile (lowest 1/5th of the household distribution) fell from 7.4% at the business cycle peak in 1979 to 5.6% at the business cycle peak in 2007, whereas the share of the top

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1% had increased from 7.4% in 1979 to 16.7% in 2007. It is fairly clear that the Trump Administration rolled back the reductions in inequality through its new economic policies and the Trump tax reforms in late 2016. As regards health-care coverage, the first open enrollment of the ACA reduced the share of uninsured people in the US from about 15% to 10%; the introduction of Medicare and Medicaid in 1965 had reduced the uninsured rate within a few years from 20% to about 15% (US Council of Economic Advisers 2017, p. 202). It is noteworthy (p. 207) that the uninsured rates have steadily declined for children ( 0); one may debate whether the overall ratio of exports to GDP is relevant for knowledge growth or whether only trade in high-technology goods is relevant—which is the empirical finding of Jungmittag (2004) for EU countries. We can write:

a = α ∗ a′′a ∗ + x′′ ( q′q ∗ −t ′′t ∗)

(5′)

Assuming zero population growth and defining k ′ : = K / ( AL ) we get from (1), (2), (3) and (4) the differential equation for dk ′ / dt:

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dk ′ / dt =  s (1 − α ∗ β ) (1 − τ ) + s′α ∗ β (1 − t ′′ ∗ t ∗)  (1 + x′x ) k ′β − ( a + δ ) k ′

(6)



Taking into account (5′) and (6), the steady state solution k ′ # (# denotes steady state) is given by: k ′ # = { s (1 − α ∗ β ) (1 − τ ) + s′α ∗ β (1 − t ′′ ∗ t ∗)  (1 + x′x ) / 1/ (1− β )



(α ∗ a′′a ∗ + x′′ ( q′q ∗ −t ′′t ∗) + δ )



(7)

We can see that the import tariff abroad t ∗—here considered to stand for a long-run tariff rate abroad, not a transitory short-term tariff—has an ambiguous impact on the level of the growth path. There is a paradoxical effect in the denominator from dampening the growth rate of knowledge which raises the level of the growth path (the same mechanics work here as in a basic model with population growth rate n; but here n = 0 and the key point is that dk ′ / dt = ( dK / dt ) / ( AL ) − ak ′; at the same time, there is a dampening effect on the level of the growth path from the numerator and the reduced savings of foreign subsidiaries). The latter effect would be overlooked (it has not been considered in the literature) without considering the role of inward FDI for overall savings in country 1. Per capita income Y / ( AL ) : = y′ is given by the term:  s (1 − α ∗ β )(1 − τ ) + s ′α ∗ β (1 − t ′′ ∗ t ∗) (1 + x ′x )  y′ # = (1 + x ′x )   α ∗ a ′′a ∗ + x ′′ ( q ′q ∗ −t ′′t ∗) + δ ) (   

β / (1− β )

(8)

As knowledge A ( t ) evolves—with e′ denoting the Euler number and A0 the initial knowledge—according to A ( t ) = A0 e′at we can write for per capita income Y / L : = y in the steady state:

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y # = (1 + x′ ( q′q ∗ −t ′′t ∗) )

  s (1 − α ∗ β ) (1 − τ ) + s′α ∗ β (1 − t ′′ ∗ t ∗)   A0   (α ∗ a′′a ∗ + x′′ ( q′q ∗ −t ′′t ∗) + δ )   α ∗a ′′a ∗+ x ′′( q ′q ∗− t ′′t ∗) ) t e′(



β / (1− β )

(9)

In ln y # − t space, the impact of a rise of the foreign tariff rate can be shown in the subsequent graph where it has been assumed that the impact of a higher t ∗ on the level of the per capita income growth path is negative so that imposing a tariff t ∗ in country 2 at the point of time t N brings an immediate fall of the level of the growth path of lny and a subsequently reduced growth rate of per capita income (Fig. A2: the slope C ′D′ is smaller than for the original path BC). Tariff-Related Effects on the level and slope of the Growth Rate

ln y C

D’ C‘

B

0

α

α’

t g α = gy

tN

t

Fig. A2  Effects of higher foreign import tariff on the level of per capita income and the long-run growth rate. Source: Own representation

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As regards complementary empirical analysis, it would be useful to analyze two different groups of countries, namely, a group of large countries, on the one hand, and a group of small countries, on the other—for the latter group, the role of inward foreign direct investment and international technology transfers could be higher than for the big economies. This, implicitly, is the growth economics of Brexit, and it also shows the effect of Trump’s import tariff on China’s long-term growth. To cover the case of the US—for Trump’s import tariff for exporters from China which consist of Chinese firms as well as US subsidiaries in China—one has to look at the additional savings term mentioned above for the case of two-way FDI. The modified result for the domestic economy—here considered to be the US—would be the following steady-state solution if y′∗ = V ′′y′ and A ∗ L ∗ / ( AL ) are assumed to be constant (it is also assumed that 0 < t ′′τ ′′ < 1): 1/ (1− β )

y′ # = (1 + x ′x )



  (1 − α ∗ β ) + αβ ∗ V ′′ ( A ∗ L ∗ / ( AL )) q ∗    s (1 − τ )     (1 − t ′′τ ′′)     + s ′α ∗ β (1 − t ′′ ∗ t ∗)     (α ∗ a′′a ∗ + x′′ (q′q ∗ −t ′′t ∗) + δ )        

β / (1− β )

(9′)

In addition to traditional Brexit analysis (see, e.g. HM Govt 2016) and Trump’s tariff analysis in a partial equilibrium approach (e.g. Zoller-­ Rydzek and Felbermayr 2018), the analysis presented herein suggests that higher import tariffs abroad go along with both a negative effect on the level of the growth path and negative effect on the long-run growth rate of per capita income. If there are import tariffs on both sides, an extended modified growth model is useful as shown in equation (9′); this result goes beyond the results of Zoller-Rydzek and Felbermayr who use a partial equilibrium model of the Trump import tariffs that ignores the effect

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of foreign direct investment. Equation (9′)—interpreted for the US— considers both Chinese import tariffs t ∗ and the US import tariff τ ′′ which would diminish the long-run US per capita GDP; the US per capita GNP can also be derived. A real appreciation of the dollar, that is a rise of q ∗, raises the numerator, but also raises the denominator so that the real exchange rate effect is ambiguous on the level of the growth path; the real appreciation will dampen the long-run growth rate—only if technology-intensive imports of intermediate goods would be considered, would one have to reconsider the specification of the progress function and indeed—with j ′′ standing for a positive parameter and j for the import-GDP ratio—an import term j ′′j ( q ∗) would have to be additionally considered in the equation for total factor productivity growth (and a similar argument holds for the R&D/GDP ratio which could also be integrated in an adequately adjusted approach). One may argue that per capita income developments in the context of protectionism are an important aspect, but the more crucial question concerns the consumption per capita effect. The incidence of an import tariff (or of a tax rate) depends on the ratio of the elasticity of supply to the sum of the elasticities of demand (η) and supply (ε). The higher this ratio is, the more the burden of the tariff will be borne by consumers, that is, the larger the fraction f ′′ of the import tariff borne by the consumers ( f ′′ = 1 / (1 + η / ε )), so that normally the government of the importing country will select goods where the demand elasticity is high or the foreign supply elasticity is low. From this perspective, the Trump Administration will not impose an import tariff on mobile (i.e. cellular) phones right from the beginning of a US-Sino trade war since here the US elasticity of demand is low, that is, one cannot easily find a substitute for mobile phones made in China (and even the US iPhone is partly assembled in China). Hence, China’s export volume will reduce considerably in the second half of 2018 as a reaction to the Trump Administration’s decision to impose higher import tariffs on about 40% of China’s total exports to the US. The net import price (net of the import tariff) will decline, and the US could collect considerable tariff revenues, but when the Trump Administration extends the coverage of imports from China facing US import tariffs, the burden for US consumers—and producers

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in the case of importing intermediate products from China—will increase considerably. This partial equilibrium picture looks all the more bleak for the US if one considers an adequately modified macro growth model with inward FDI and outward FDI as shown above. The level of per capita income in the steady state (y#) is determined by 1/ (1− β )

y # = (1 + x′x )

  s (1 − α ∗ β ) (1 − τ ) + s′α ∗ β (1 − t ′′ ∗ t ∗)   A0   (α ∗ a′′a ∗ + x′′ ( q′q ∗ −t ′′t ∗) + δ )  

α ∗a a ∗+ x ( q q ∗− t t ∗) ) t e′( ′′

′′ ′

′′

β / (1− β )

(9″)

As regards the impact of foreign import tariffs on the growth rate of knowledge, and hence the role of output per capita growth in the steady state, the effect clearly is negative—at least as long as the real exchange rate is treated as exogenous; this assumption could easily be relaxed in a comprehensive macro model. The role of cumulated inward FDI on the level of the growth rate of y is ambiguous since in the numerator there is the expression α ∗ β s′ (1 − t ′′ ∗ t ∗) − s (1 − τ ) +  s (1 − τ ) / (α ∗ β )  which is likely to be positive as long as the foreign import tariff rate is zero; at the same time, one has to consider the fact that the presence of foreign investors raises the growth rate of knowledge which dampens the level of the growth path.

{

}

 apital Market Dynamics in the Context of Brexit and Related C US Aspects There are considerable international effects in the field of foreign direct investment and portfolio capital flows as well as trade in the context of Brexit. Many key aspects have been analyzed in the special Brexit issue of the journal International Economics and Economic Policy, No. 1, 2019. Among key findings of a paper by Eichengreen (2019) is the insight that the stock of foreign portfolio investment in the UK should drop post-­

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Brexit by 12% which, of course, raises the question as to what countries the UK portfolio capital outflows would go; the US is certain to be among the top receivers of this type of international portfolio reallocation, and thus Brexit could help the Trump Administration through lower interest rates. The US could also benefit from somewhat higher FDI inflows, including outflows from City of London banks to the US. Based on an event methodology approach, one can consider the impact of Brexit on corporate risk premiums where the focus could be on the UK and the Eurozone (but also on the US). One should have in mind that— according to BEA figures—almost 7% of the UK’s gross domestic product stems from US subsidiaries’ production in the UK. As regards Brexit-related effects on foreign direct investment in the UK, it is clear that the UK will face lower FDI inflows post-Brexit; in order to compensate this reduced locational attractiveness for foreign investors, the UK could reduce corporate tax rates (Welfens and Baier 2018). As regards other key aspects of Brexit, see Welfens and Hanrahan (2018) and Welfens (2017b). The Brexit-related risk premiums for various sectors—risk premium defined as the difference between the corporate bond interest rate and the government bond interest rate (for the same maturity)—are considerable in the UK, including the non-financial sectors and some other sectors as well (see Kadiric and Korus 2019); the focus has been on the Brexit majority in the 2016 referendum as a Brexit event I, but obviously the implementation of Brexit in 2019 will be event II; besides the Brexit event variable, a battery of economic control variables was used. The event methodology could also be applied to Sino-US trade signals from the Trump Administration so that the impact of US trade policy on sectoral risk premiums in the US, in China and in Europe could be analyzed. Broader financial and mone-

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tary aspects have been analyzed by Welfens (2019) and Welfens and Xiong (2019).

References Blanchard, E., & Matschke, X. (2012). US Multinationals and Preferential Market Access, May 30–31. Paper presented at VfS Meeting/Committee on International Trade and Economic Policy, University of Augsburg, CESifo Working Paper 3847. Council of Economic Advisers. (2017, January). Economic Report of the President. Retrieved from https://obamawhitehouse.archives.gov/sites/default/files/ docs/2017_economic_report_of_president.pdf. Eichengreen, B. (2019). The International Financial Implications of Brexit. International Economics and Economic Policy, 16(1). https://doi.org/10.1007/ s10368-018-0422-x. Evenett, S., & Fritz, J. (2017). Will Awe Trump Rules—The 21st Global Trade Alert Report. Centre for Economic Policy Research: London. Foellmi, R., & Martinez, I. (2017). Volatile Top Income Shares in Switzerland? Reassessing the Evolution Between 1981 and 2010. Review of Economics and Statistics, 99(5), 793–809. https://doi.org/10.1162/REST_a_00644. HM Govt. (2016, April). HM Treasury Analysis: The Long-Term Economic Impact of EU Membership and the Alternatives. London. Jungmittag, A. (2004). Innovations, Technological Specialisation and Economic Growth in the EU. International Economics and Economic Policy, 1(2–3), 247–273. Jungmittag, A., & Welfens, P.  J. J. (2016). Beyond EU-US Trade Dynamics: TTIP Effects Related to Foreign Direct Investment and ­Innovation. EIIW Discussion Paper No. 212. Retrieved from http://www.eiiw.eu/fileadmin/eiiw/ Daten/Publikationen/Gelbe_Reihe/disbei212.pdf. Kadiric, S., & Korus, A. (2019). Effects of Brexit on Corporate Yield Spreads: Evidence from UK and Eurozone Corporate Bond Markets. International Economics and Economic Policy, 16(1). https://doi.org/10.1007/s10368018-00424-z. Kutlina-Dimitrova, Z. (2018, September). Government Procurement: Data, Trends and Protectionist Tendencies, DG Trade, Chief Economist Note, Issue 3, Brussels.

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Kutlina-Dimitrova, Z., & Lakatos, C. (2017). The Global Costs of Protectionism. Policy Research Working Paper No. 8277, World Bank Group, Washington, DC. Melitz, M. J. (2003). The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity. Econometrica, 71, 1695–1725. Welfens, P. J. J. (2015). Innovation, Inequality and a Golden Rule for Growth in an Economy with Cobb-Douglas Function and an R&D Sector. International Economics and Economic Policy, 12(4), 469–496. https://doi. org/10.1007/s10368-015-0314-2. Welfens, P. J. J. (2017a). Macro Innovation Dynamics and the Golden Age—New Insights into Schumpeterian Dynamics, Inequality and Economic Growth. Heidelberg and Berlin: Springer. Welfens, P. J. J. (2017b). An Accidental BREXIT. London: Palgrave Macmillan. Welfens, P.  J. J. (2019). Lack of International Risk Management in Brexit? International Economics and Economic Policy, 16(1). https://doi.org/10.1007/ s10368-019-00433-6. Welfens, P. J. J., & Baier, F. (2018). BREXIT and Foreign Direct Investment: Key Issues and New Empirical Findings. International Journal of Financial Studies, 6(2), 46. https://doi.org/10.3390/ijfs6020046. Welfens, P. J. J., & Hanrahan, D. (2018). BREXIT: Key Analytical Issues and Insights from Revised Economic Forecasts. EIIW Discussion Paper No. 235. Retrieved from www.eiiw.eu. Welfens, P. J. J., & Xiong, T. (2019). BREXIT Perspectives: Financial Market Dynamics, Welfare Aspects and Problems from Slower Growth. International Economics and Economic Policy, 16(1). https://doi.org/10.1007/s10368019-00432-7. Zoller-Rydzek, B., & Felbermayr, G. (2018, November). Who is Paying for the Trade War with China? EconPol Policy Brief 11.

Part III US-Asian and Global Economic Perspectives

6 US-Asia-EU Perspectives

 he US-China Tariff Conflict and Its Impact T on the EU27, the UK and Asia Reducing tariffs means trade creation among the countries concerned, and from this perspective, the accession of China to the World Trade Organization (WTO) in 2001 has been a crucial step forward for China and all its 150 main trading partners, including the EU28 and the US. As the Trump Administration has imposed a 10% tariff on part of Chinese imports in 2018 and China has, in turn, imposed a retaliation tariff on part of the imports from the US—partly agricultural goods, partly manufacturing goods—the Sino-US developments in trade are similar to a regional disintegration project: while regional integration means trade creation for the countries with trade preferences, those countries outside the integration scheme will suffer from trade diversion, hence the US-­ China tariff war amounts to a quasi-disintegration project and means that Sino-US trade will be reduced, while others—for example, Japan, the UK or the EU27—will benefit from trade creation (Gros 2018). The EU’s export growth to China will increase more than otherwise since the competitors from the US face a weakened market access to China, while © The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6_6

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EU firms will also export more to the US since China’s export growth is weakened through US import tariffs imposed on Chinese firms. EU firms’ export prices obtained in China could increase as there is weaker competition from the US—however, US subsidiaries in China might offer reduced prices in China in an attempt to avoid rising underutilization of production capacity; similarly, EU firms could raise export prices in the US, and at the same time, Chinese firms will sell export goods at lower prices in both Asia and the EU countries. For Japanese firms, a similar logic applies with respect to both the US and Chinese markets, so that the EU27, the UK and Japan will be able to improve their terms of trade: per unit of import goods, which come in at lower prices, is able to fetch higher export prices, so that less export goods per unit of import goods have to be sold abroad. The Eurozone countries, however, face an additional aspect, namely, a currency depreciation that will be driven by Italy’s economic policy under the Conte government— this depreciation will raise import prices in the Eurozone countries. Moreover, the profitability of US subsidiaries in China will be weakened as imports of US intermediate products will become more expensive so that the US firms will lose market share in China both through lower exports from the US and lower sales of US subsidiaries in China. The UK post-Brexit will face a serious problem if it would want to conclude a free trade agreement with China; not only might the conditions for UK market access in China not be very attractive, since China’s economic weight is about five times that of the UK so that the UK does not have much negotiation leverage vis-à-vis China in free trade negotiations unless the UK would remain in the EU customs union and the EU28 would negotiate with China about a free trade agreement; the economic weight of the EU—with gross domestic product expressed in purchasing power parity figures—is roughly the same as that of China. The US negotiation position vis-à-vis China is not very strong, although China cannot easily retaliate since its imports of about $100 billion from the US are partly agricultural goods, say, with China switching to Brazil for imports of soy beans (as Brazil is a major source of supply) instead of the US in the medium term. The US imports from China are largely manufacturing goods as is the case of the US imports from the EU28 where EU services exports to the US also play an important role, particularly concerning the case of the UK.

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The more aggressive the US tariff policy vis-à-vis China is, the more China’s strategic view in the field of trade policy will try to improve and expand trade relations with Associations of Southeast Asian Nations (ASEAN), Japan and the EU countries. Rising Chinese foreign direct investment in these three partner regions could be a result of higher US import tariffs on Chinese goods. China would naturally also want to rely less on high-tech products imported from the US since this has reinforced China’s strategic vulnerability in a US-Sino trade conflict. All of this could dampen China’s growth in the short run but might well lead to higher medium-term growth. The US, in turn, has pushed for a strange clause in the NAFTA-successor treaty as the new treaty says that the renegotiated free trade agreement with Canada and Mexico can be revoked at short notice once Canada or Mexico should conclude a free trade agreement with a non-market economy (read: China). Here, the Trump Administration is giving a signal of what US bilateralism could mean— not just for Canada and Mexico in terms of reduced policy autonomy, but potentially also for the UK or the EU27. Once the UK has left the European Union, it might quickly find out that Brexit does not mean to “take back control”, but rather that the UK will become a vassal of the US. When President Obama took office in the US, the economic weights of the US, the EU and China were about equal: 16% of global income (figures based on purchasing power parity data from the World Bank). How will the world economy change by 2050? With China and India in Asia continuing economic catching up, the global weights would shift considerably in the sense that Asia’s gross domestic product would be 51% of the global total, while Europe would be 18%, and the US plus Canada (North America) would represent 15%. Sub-Saharan Africa and the Middle East and North Africa would stand for 2 and 3%, respectively, and Latin America and the Caribbean would represent 10% of global income in 2050. If, however, China and India would face the so-­ called middle income trap, then Asia would represent 32% of the world economy in 2050, Europe and North America 26% and 23%, respectively (see Figs. 6.1a and 6.1b). This would mean that the Western world would still dominate the global economic system in 2050. Already in 2018, 60% of the world population is now in Asia, with a gradual decline to be anticipated by 2050 as Africa is characterized by high population

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a

1%

Middle East & North Africa

18%

Rest of World Asia North America

10% 51%

Latin America & Caribbean Europe

15%

Sub-Saharan Africa

3% 5% 2%

b

Middle East & North Africa Rest of World

26%

Asia 32%

North America Latin America & Caribbean

9%

Europe 23%

Sub-Saharan Africa

Fig. 6.1  (a) Asian century scenario, Asia GDP in 2050, $148 trillion. (b) Middle-­ income trap scenario, Asia GDP in 2050, $61 trillion. Source: Own representation of data presented in Asian Development Bank (2011), Asia 2050: Realizing the Asian Century, p. 10

growth (UN 2017). These two scenarios are rather different: in the first scenario, the logic of trade theory and trade gravity modeling suggests that Asia would be a dominant source of exports, and to the extent that ASEAN countries and China should rather closely cooperate politically, the role of China would be greatly reinforced. EU-China trade as well as the EU-ASEAN trade would have expanded strongly by 2050—assuming that the European Union still exists at that time.

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Fig. 6.2  Multimodal transportation routes from China to Europe. Source: Merics, Mercator Institute for China Studies (2018), https://www.merics.org/en/bri-tracker/ mapping-the-belt-and-road-initiative

The US would no longer be the EU’s most important trading partner, this role being assumed by China. At the same time, the EU would face new problems, as with EU-Asian trade dominating, it would be rather unclear how the EU would propose protecting the routes for sea transportation. Roughly 90% of world trade is on the basis of shipping, and for many hundreds of years, the military protection of trade routes is an important political topic. Part of the EU’s trade to Asia would be overland, using rather reliable railway transportation; here, Russia and Kazakhstan would play a key role as transit countries for intermediate product trade for just-in-time production (see Fig. 6.2). Hence, the EU would be interested in stable and friendly political relations with Russia and Kazakhstan. China’s One Belt One Road (OBOR) Initiative is bound to create additional EU28-China trade where US subsidiaries in Europe naturally would also benefit from this. The Chinese investments in ports worldwide are impressive (see Fig. 6.3) and could certainly support the expansion of China’s trade in the long run.

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Fig. 6.3  Chinese-owned ports worldwide. Source: Kynge et al. (2017)

The key questions will be how to protect the EU-Asia sea-based transportation of goods and services. There is a caveat, however, since an increasing share of global trade (MGI 2016) will be trade in data and digital services so that the share of maritime shipping in global trade will have reduced by 2050 compared to 2020; however, sea-based trade could still dominate in the long run. US trade with Asia will dominate total US trade in 2050, and thus the US would also have a strong interest in protecting sea routes to Asia which would largely be the same routes as used by EU-Asia traders. Thus, there is sound reason for continued EU-US cooperation in security policy and in the economic field. As regards military cooperation, NATO as a transatlantic organization plays a crucial role. If, however, President Trump or other US populist presidents following Trump would seriously undermine NATO or even bring about the collapse of NATO, the Western world be a divided camp in facing these Asian challenges.

US Protectionist Trade Policy Vis-à-Vis China The most serious trade conflict of the US is with China; however, other trade conflicts played a kind of signaling role under the Trump Administration before the US trade policy turned its focus to China in

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2018. The US has adopted a modified NAFTA agreement in summer 2018 where higher requirements regarding rules of origin were introduced, namely, 75% regional value-added is now required (previously, this figure was 62.5%); for companies paying wages above $16/hour, 40–45% is the minimum regional value-added requirement. There are also changes along the lines of the TPP agreement not ratified by the US—these changes concern digital trade, environmental regulations and labor regulations. The higher the required share of national or regional origin in value-added (market value of production), the more difficult it is for outsiders to benefit from a US-Canada-Mexico free trade accord. Canada has to open further its dairy product markets; Mexico, on the other hand, will have to open up its financial markets more than was previously the case to US banks and other financial service providers. New revision clauses introduced in the renegotiated NAFTA agreement create additional uncertainty for Canada and Mexico. The US has also imposed import tariffs on aluminum and steel from the EU, Turkey, China, Canada and Mexico, which, in turn, have imposed “balancing tariffs” on US products. President Trump’s argument, which invokes reasons of national security to justify imposing import tariffs on aluminum and steel from NATO partner countries, is particularly absurd; it is a blatant and public lie against which EU countries dare not to raise counterarguments—a situation which makes the Western world look like bad theater. If politicians do not stand up to defend facts and the truth, they create an environment that is conducive to the emergence of risk, risk to liberty, the market economy and the rule of law. There is no liberty in effectively being forced to repeat the hegemon’s lies in public, there could be no trust in market partners if lies would become the new standard of public life and there can be no justice if lies would shape the courts’ verdicts. The very purpose of the founders of the US was life, liberty and the pursuit of happiness—and there can be no happiness if the president is publishing lies on a daily basis and apparently even expects applause for this. President Trump is on the verge of taking the US back into the centuries before the Enlightenment, and those politicians who support him are themselves turning against the spirit of the US Constitution of 1776 as much as Donald Trump himself. It seems that the banking crisis has destabilized the US society as is the case in the UK (see on this Welfens

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2017, or related TV clip from Georgetown University); in the UK, the Cameron and May governments also had problems with a simple fact, namely, their repeated claims that immigration was a long-run economic burden for the UK, while, in reality, analysis by the OECD—of which the UK itself is a member—showed the opposite (see OECD 2013 and Kierzenkowski et al. 2016). How can Prime Minister May continue to indulge in such strange conjecture in her Brexit White Paper of 2017? As regards the US government’s official view on trade policy, the following statement can be found in the IMF (2018) Article IV Report on pp. 25–26: “The administration regards recent steps to impose tariffs as a step toward creating the leverage needed to achieve more free, fair and reciprocal trade…The authorities emphasized their strong commitment to the WTO and listed WTO reforms as a key trade priority, welcoming reform proposals from other members. They recognized the risk to the global system of relying on national security as grounds for trade action, but expressed that lack of progress in international fora warranted such actions.” One might argue that since the (primarily Western) crisis of 2008, many countries in the world economy have adopted new protectionist measures, be it in the form of non-tariff barriers or in the form of subsidizing exports. From an economic perspective, there are arguments for the subsidization of certain sectors or firms only if there is a focus on the promotion of innovation dynamics and the internalization of positive external effects from innovation. If there is any other—unfair—subsidization, the importing country could impose countervailing duties. However, the longer the economic upswing in the Western industrialized countries lasted and the lower the unemployment rates, the better the opportunities to reduce import barriers became. Adopting a Transatlantic Trade and Investment Partnership (TTIP) could have been a signal under the Obama Administration, but Germany and France basically blocked this opportunity—partly due to a too comprehensive mandate for the European Commission; leaving out, for example, the health-care sector (following the example of the audiovisual sector) would have been useful as would a more transparent negotiation style on the part of the Commission which did not understand that this was the first big Western liberalization project in the Internet age. The Transatlantic Trade and Investment Partnership was on the table for Congress when President

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Obama left the White House, but his successor Donald Trump buried it right at the beginning of his term in office. TTIP could have generated considerable benefits for both the US and the European Union, namely, via more trade dynamics (e.g. Vandenbussche 2018) and more foreign direct investment and higher innovation dynamics (Jungmittag and Welfens 2016); higher innovation dynamics are largely linked to a higher inward foreign direct investment, and this aspect should indeed be emphasized in a long-run perspective that considers globalization dynamics as a combination of both trade expansion and more foreign direct investment and innovation. President Trump has a list of countries with whom the US has a trade balance deficit, and China is a big country that is almost at the top of this list. The bilateral current account deficit of the US vis-à-vis China was about 2% in 2016/17, and this is not likely to fall much in the medium term due to Trump’s protectionism. Trump’s trade policy strategy is an approach which can, broadly speaking, be summarized as follows: reduce imports of goods, raise military exports. This, however, is not an adequate approach and will not work. A better approach for reducing the US current account deficit would be to emphasize three points: • It would raise the US savings rate, for example, through adequate tax incentives (thus far, there is nothing to be seen in this respect under the Trump Administration); • the US government would also consider to reduce the government deficit-GDP ratio; • the share of the public investment-GDP ratio should be raised since this will dampen the interest-raising effect of higher deficit-GDP ratios (for empirical evidence on a panel of 31 countries, see Pepel-Srebrny 2017). One may point out that certain infrastructure investment could indeed stimulate long-run export growth, namely, if said infrastructure projects would focus on options to reduce international transaction and transportation costs. There could be a problem in the sense that many infrastructure projects which stimulate exports will also facilitate imports so that the effect of infrastructure investment on the current account is ambiguous; it indeed could be negative if the induced increase of the private investment-GDP ratio would be considerable.

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These measures, when combined, could bring the US a balanced current account within less than five years; the background is that net exports of goods and services in a macroeconomic perspective simply is the balance of private savings plus government savings minus private investment. From this perspective, the idea of President Trump to reduce the tax rate and to raise government expenditures relative to gross domestic product is very inconsistent with what Trump wants to achieve, namely, a lower trade balance-GDP ratio or a lower current account-GDP ratio. Adopting a broadly protectionist policy agenda will undermine international stability and not help the US with its high—and, under Trump, increasing—current account deficit relative to national income (note: for the sake of simplicity, no explicit distinction between gross domestic product and national income is made here). Modern trade policy can take various forms of protectionism. Tariffs as well as non-tariff barriers can be imposed on imports—both measures will bring about a rise of prices for consumers, but for the producers (coming from a big country such as China), the offer price, net of the tariff rate, will fall, so that the foreign producers and exporters, respectively, will bear part of the burden of the tariff. One can identify five effects of an import tariff in a big country which imposes an import tariff on a partner country which is assumed to be a big country, too; and it will also be assumed that country 1, that is, the home country (e.g. the US), has multinational companies with outward foreign direct investment, that is subsidiaries with production, in the other big country (read China): • The more elastic domestic demand in the importing countries is— hence, there are many alternatives to the foreign products imported— the stronger is the decline of the net import price: thus, the burden on the foreign country and its firms is rather large. Consumers will also want to buy more domestic goods as they have become relatively cheaper; this is the so-called substitution effect (which is valid as long as there is no strong appreciation of the currency of the country with the import tariff). • The foreign supply country will also face a reduction of output due to reduced exports. As import demand abroad is reduced due to import tariffs, real income—and output—in the exporting country will fall, which is a negative real income effect.

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• As the import tariff in the US causes prices to fall in the world market, including in China, the profits of US subsidiaries in China will also fall which means that lower profits are to be expected by investors in those US multinational companies facing lower profit transfers from abroad. Hence, there is a negative wealth effect in the US, which could translate into lower international net capital inflows. • Under flexible exchange rates, the latter effect brings about a depreciation of the currency, while the improvement of the trade balance in the context of lower imports from abroad (imports have reduced due to the import tariffs) should bring about an appreciation of the currency. The exchange rate effect thus is unclear. • Moreover, other exporters to the US—say from the European Union (big country 3)—could raise offer prices in the US in order to benefit from higher sectoral prices, and hence the profits of EU firms could increase. This effect, which is in line with relevant pricing to market strategies of exporters from country 3, then generates, along with the rising import prices of firms from country 2 (read China: with exporters facing the US import tariff), an inflationary pressure effect in the US. • Country 3 (the European Union) might record a positive real income effect as firms from country 2 will offer exports goods which can no longer be exported to the US—and additional exports—to country 3 at rather low prices. If parts of imported goods from China are intermediate products, this will stimulate the output and exports of country 3, including exports from the EU to the US; and if China imposes retaliatory tariffs on the US, it is clear that EU firms will also be able to export more to China. At the bottom line, the EU could record a positive real income effect from the US measure of imposing import tariffs on China. The real income effect in the EU will stimulate imports from the US so that the positive income effect in country 3 could offset the negative real income effect in country 2. • Finally, once a country such as the US—normally in favor of free trade or at least low barriers to trade—switches to an aggressive tariff policy, there will be uncertainty in most countries in the world economy as other countries could also impose retaliatory tariffs. This additional risk—viewed from the perspective of a typical investor—will reduce investment worldwide and thus particularly negatively affect major

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exporters of machinery and equipment (e.g. Germany, the Republic of Korea, Japan, Italy, France, the Netherlands, Switzerland, UK and Canada). • One could possibly find empirical evidence of higher risk premiums on corporate bonds in those Chinese sectors that face high US import tariffs. The risk premium is the difference between the corporate bond yield (with the same maturity and rating class as a benchmark government bond) and the interest rate on the relevant government bond. • Country 2 could not only impose retaliatory tariffs on imports from country 1 (which will lead to a negative global output effect) but also reduce the amount of foreign reserves held in the form of government bonds from country 1. If China’s central bank would start to sell dollar reserves—usually they have the form of short-term bonds—the effect is a rise of the US interest rate and a dollar depreciation. This depreciation will usually prevent the central bank of China from selling large chunks of its foreign reserves as the depreciation of the dollar implies losses for China’s central bank. It seems that the US government—through the US Trade Representative—has imposed import tariffs at first on those Chinese export goods that stand for intermediate products or industrial goods sold to firms. Only after 2018, when the Trump Administration might consider imposing import tariffs on all Chinese exports to the US, would the ability of the US government to pick particular sectors with low welfare cost for the US more or less come to an end. Zoller-Rydzek and Felbermayr (2018) have looked at the first two points and suggest that the US has benefited from its aggressive trade policy in the short term, which indeed cannot be excluded. However, the medium and long run is likely to witness a US and global welfare loss from US import tariffs—certainly, if China and the EU would adopt retaliatory tariffs. The US will be unable to prevent the share of China’s national income in world income from rising for many years to come. This means that China’s regional and global power will rise. As one may anticipate that China’s growth rate will gradually fall—as its per capita income and technology gap vis-à-vis the EU and the US (in 2017: one-third of the US

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purchasing power parity per capita income figure)—the Chinese political system will face the difficulties of managing this macroeconomic, structural and political challenge. One cannot rule out that there will be a middle-income trap problem for China, which has also been a problem for some other developing economies experiencing catching up (Wagner 2017). Slower growth in China could make it more difficult to achieve full employment and political stability in China. From a Western perspective, it will be quite important to get China on board as a sustainable partner in defending multilateralism and global cooperation. As regards the EU, it seems that China is not a major economic or political threat and that there are many opportunities for cooperation with China—not ruling out occasional spats over Chinese foreign direct investment in OECD countries, where Chinese investment, particularly by state-owned enterprises and human rights issues, could create concern in Western countries. Figure 6.4 shows the linkages between protectionist US tariffs and negative output, real income and subsidiaries’ price and profit

United States

(1a)

(1c) (1b)

(2b) (2a)

(3a) EU (Eurozone)

China US & EU Firms in China

(2c) (3b)

ASEAN

(3c) Fig. 6.4  Global interdependency effects of a US protectionist policy. Source: Own representation. (1a) The US imposes import tariffs. US import tariffs cause an excess supply in China, and hence lower prices in China (and the EU), so that the profits of US and EU subsidiaries in China will fall (US real income could fall). (1b) Reduction of China’s exports and decline of Chinese output growth; US real income rises. (1c) Substitution effect: US consumers buy more US goods. (2a) More Chinese foreign direct investment ASEAN. (2b) Higher ASEAN exports to China. (2c) Higher ASEAN exports to the US. (3a) Rise of EU exports to the US. (3b) Rise of EU exports to ASEAN. (3c) Rise of EU exports to China (provided that China imposes countervailing duties on the US)

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reduction effects in China. Moreover, the real gross national product of the EU will fall, and this will have negative repercussion effects on both the US and China. The standard textbook analysis of an “optimum tariff” in a big economy has been developed in a setting without outward foreign direct investment. This, however, is not adequate for the situation shown in the figure on the US-Asia-Europe triangle. Foreign investment by US firms in China implies that the welfare benefit expected in the standard optimum tariff literature is smaller than an adequately enhanced analysis with foreign investment would suggest (see Appendix J). The net welfare effect of imposing import tariffs could be negative for the US since the excess supply of goods occurring in China implies reduced profits on the part of US firms in China which translates into lower dividends transferred from US subsidiaries in China to the US headquarter companies and hence lower international dividend payments obtained by the US and US citizens, respectively. Thus, the growth of the US national real income (read: gross national income GNI) would be smaller than the growth of US real gross domestic product (GDP). The distinction between GDP and GNI is often overlooked, although it is quite important in a period of trade and foreign direct investment globalization.

Is China a Challenge for the EU? Indeed, via a Destabilization of the US From a broader EU perspective, the most serious China-related risk is the potential for the destabilization of the US through China’s strongly rising exports and the inability of a populist US government to develop a consistent strategy to reduce the bilateral US trade balance and current account balance deficits (relative to national income). If the bilateral US current account deficit should raise beyond 2% in the long run, trade conflicts with China are likely to intensify further. On the other hand, US multinational firms will be interested in maintaining a strong position in China’s markets: US subsidiaries’ profits probably stand for 2–3% of Chinese GDP which, in turn, amounts to about 2–3% of US GDP (the official figures from the System of National Accounts, however, do

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not show a considerable difference between the US GDP and the US gross national income). A large share of these profits is reinvested as long as China is an attractive location and is politically stable. If the US would be destabilized and thus become a structurally populist country, this would bring instability to the Western world and the entire global system. A populist US would be rather protectionist and could also become aggressive in terms of its foreign or security policy; this is bound to destabilize the European Union. Hence, the EU has an incentive to push for a containment of structural populism in the US. This is a new challenge. The only country not sharing this interest is Italy under the current Italian populist government, but this is an internal Italian, and, to some extent, an EU, problem. Populism in the EU28 is rather strong if one takes into account that the UK’s Brexit is also a populist project—it would never have been on the agenda without the populist UKIP party (and a naïve Prime Minister Cameron). It is not clear that the EU27 will be able to achieve stabilization and reforms in the European Union; the equation obviously is rather complicated as the US and China are part and parcel of this challenge. One may hope that the European Commission and the EU can find a compromise with Rome on the Italian budget deficit-GDP ratio and the associated Italian fiscal expenditure structure. A temporary increase in the Italian budget would be acceptable only if Italy’s public investment-GDP ratio, R&D promotion as well as retraining measures of unskilled workers—all designed to raise output growth—would be raised. It will quickly become clear that Italy’s government will face big problems in achieving its deficit-GDP ratio. To the extent that the Trump Administration explicitly or implicitly supports the Conte government in the issue of the Italian deficit-GDP ratio, this would mark an active anti-EU policy on the part of the US—a first in US history. It is obvious that political risk and uncertainty are new problems in the US and indeed the Western world. This makes Western countries—representing democracy, the market economy and rule of law—a less attractive model for many countries in Asia, Africa and Latin America. The most important short-term measure to fight the expansion of populism in the US and Europe is to increase the quality of information and news which is available via the Internet. Without adequate quality signals

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online, and thus digital new regulations, the modern Western world is threatened. It might become more radical and more unstable and then lose the global competition of systems against an autocratic China. How an autocratic China would interact with populist countries in Europe and a populist US is yet unclear, but this would make the world look rather conflict-prone. One example of how new political conflicts can quickly emerge between, even neighboring, populist countries is the case of Italy and Austria in 2018, with tensions emerging concerning old issues in South Tyrol, a region in northern Italy which has a significant German-speaking population and which borders Austria. The Austrian government has discussed offering Austrian passports to German-­ speaking Italians in this region, a suggestion that clearly upset the populist-­nationalist Italian government in Rome. Europe could indeed be destabilized rather quickly if populism should spread in Europe further.

APEC Challenges and Asian-EU Perspectives The US plays a crucial role in many institutions in Asia, including the Asian Development Bank (ADB), which is a big actor in project financing in Asia. The ADB also helped to overcome the Asian financial crisis of 1997/98 when the ADB contributed about one-third of the overall rescue financing package that was dominated by the International Monetary Fund. Membership of the US in APEC (Asia-Pacific Economic Cooperation) is another crucial point of influence—APEC is a network of cooperation governments and firms from the 21 countries involved where most are from Asia. The November 2018 APEC meeting in Papua New Guinea was overshadowed by the Sino-US trade conflict. President Trump did not attend but instead sent his Vice President, Mike Pence. A key topic of the APEC meeting was trade liberalization and the prospects of an APEC free trade zone. However, with Trump having rejected the Trans-Pacific Partnership in early 2017, the prospects for the regional integration of APEC countries are modest. For the first time since the creation of APEC in 1989, the summit ended without a joint communiqué, and it seems that US protectionism is the main reason for this; once again, the US under President Trump is

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undermining international cooperation. It is noteworthy that APEC is a big actor as it groups together Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan, Thailand, the US and Vietnam (one may argue that India is a country which is noticeably missing in this cooperation group). Since 2017, Japan has found itself in a rather new situation, as it—unwillingly—became the leader in the Trans-Pacific Partnership after the Trump Administration refused to ratify the treaty. In APEC, China and Japan are the two leading countries if one disregards the US, but the Sino-US trade conflicts imply that the Trump government will put pressure on Japan to block China’s ambitions within APEC. Here, American political leverage lies in Japan’s security interests. The main information that emerged during the APEC summit was the US announcement that it wants to work with Australia to create a joint naval base in Papua New Guinea, obviously a project intended to contain China’s growing political influence in the Pacific area. It is obvious that China’s economic expansion will raise many new challenges in Asia and worldwide. China’s One Belt One Road (OBOR) program is an offer from China’s government to roll out a large international infrastructure project with operations in more than 60 partner countries—creating an infrastructure network which ends in Germany and France. Several of China’s neighboring countries have become concerned about rising foreign indebtedness in the context of the Chinese OBOR program; and the US has signaled at the APEC meeting in November 2018 that countries interested in infrastructure modernization could get better deals if they would instead cooperate with the US. Thus, it is obvious that there is a serious growing rivalry between China and the US in the Asian region. The threat of the US to increase import tariffs on Chinese exports to the US—and to increase the amount of goods covered—creates uncertainty not only for China but also for the whole of Asia. The rising incentive for Chinese firms to consider higher foreign direct investment outflows to ASEAN countries is a paradox effect from a US perspective since such higher Chinese foreign direct investment weakens the economic role of the US in ASEAN (and also undermines the leading role of EU investors in ASEAN countries). As regards China’s

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100 20

80

15

Thousands

70 60 50

Thousands

90

10 5 0

40 30 20 10

Fig. 6.5  EU28 and ASEAN GDP per capita 2017, purchasing power parity (PPP), constant international dollar. Source: World Bank, World Development Indicators

main imports, Japan, South Korea, the US and Germany are leading countries, while, on the export side, the US, Hong Kong, Japan, South Korea and Germany are major Chinese export destinations. As regards a comparison of EU countries and ASEAN countries, one can see from the subsequent figures that Germany is China’s No. 1 import country in the EU&ASEAN group, followed by several ASEAN countries. As regards China’s export side, Germany and the Netherlands are two leading importing countries in the EU&ASEAN group, but several ASEAN countries are not far behind. As regards China’s foreign direct investment flows and outward FDI stocks, it is obvious that Asian countries are more important for China than EU countries, which, however, stand for a higher real per capita income (and per capita real gross national product), than ASEAN countries—except for Singapore, Malaysia and the small but oil-rich country Brunei Darussalam (see Fig 6.5). The geographic proximity of Japan, South Korea and ASEAN countries to China explains why Asian partners play a strong role for China’s trade and foreign direct investment dynamics (for more on China’s outward direct investment flows and stocks, see Appendix K) (see Figs. 6.6–6.11 on China, EU and ASEAN linkages).

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Billions

China's Top 30 Import Partners in 2016, US$ 200 180 160 140 120 100 80 60 40 20 0

Korea, Rep. Australia Thailand Saudi Arabia United Kingdom Italy

Oman United Arab Emirates

Japan Malaysia Vietnam France Chile Hong Kong, China India Netherlands

United States Brazil Russian Federation South Africa Canada Iran, Islamic Rep. Iraq

Germany Switzerland Singapore Indonesia Philippines Angola Mexico

Fig. 6.6  China’s top 30 import partners, 2016, US dollar. Source: WITS, World Integrated Trade Solution Database, EIIW calculations

Billions

China's Top 30 Export Destinations in 2016, US$ 450 400 350 300 250 200 150 100 50 0

United States Germany United Kingdom Australia United Arab Emirates France Pakistan Belgium

Hong Kong, China Vietnam Singapore Thailand Philippines Brazil Turkey Bangladesh

Japan India Malaysia Mexico Canada Spain Iran, Islamic Rep.

Korea, Rep. Netherlands Russian Federation Indonesia Italy Saudi Arabia Poland

Fig. 6.7  China’s top 30 export destinations, 2016, US dollar. Source: WITS, World Integrated Trade Solution Database, EIIW calculations

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70 1.4 1.2

50

Billion

40 30

Billion

60

1 0.8 0.6 0.4 0.2 0

20 10 0

Fig. 6.8  China’s exports to EU28 and ASEAN countries, 2016, US dollar. Source: WITS, World Integrated Trade Solution Database, EIIW calculations

China's Imports from EU28 and ASEAN Countries in 2016, US$ 90 70

Billion

60 50 40

Billion

80

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0

30 20 10 0

Fig. 6.9  China’s imports from EU28 and ASEAN countries, 2016, US dollar. Source: WITS, World Integrated Trade Solution Database, EIIW calculations

239

% of GDP

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14% 12% 10% 8% 6% 4% 2% 0%

ASEAN Countries Exports to Germany and the EU28, as Percentage of GDP, 2011

Singapore Cambodia Vietnam

Malaysia Thailand Philippines Indonesia

Brunei Darussalam

ASEAN Countries' Exports to Germany (% GDP) ASEAN Countries' Exports to EU28 (% GDP)

Fig. 6.10  Exports of ASEAN countries to the EU28 and Germany, as percentage of GDP, 2011. Source: EIIW calculations using data from the OECD and World Bank, World Development Indicators

Exports of EU28 Countries to ASEAN, as Percentage of GDP, 2011 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

Exports of EU28 Countries (% of respective GDP, 2011)

Fig. 6.11  Exports of EU countries to ASEAN, as percentage of GDP, 2011. Source: EIIW calculations using data from the OECD and World Bank, World Development Indicators

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References ADB. (2011). Asia 2050: Realizing the Asian Century (H. S. Kohli, A. Snood, & A. Sharma, Eds.). Singapore: Asian Development Bank. Gros, D. (2018, November). US China Trade War and Europe: ‘If Two Quarrel, the Third Rejoices’, EconPol Europe Opinion 13. IMF. (2018). United States of America: Staff Concluding Statement of the 2018 Article IV Mission, dated June 14, 2018, Country Report 18/207. IMF: Washington, DC. Jungmittag, A., & Welfens, P.  J. J. (2016). Beyond EU-US Trade Dynamics: TTIP Effects Related to Foreign Direct Investment and Innovation. EIIW Discussion Paper No. 212. Retrieved from http://www.eiiw.eu/fileadmin/eiiw/ Daten/Publikationen/Gelbe_Reihe/disbei212.pdf. Kierzenkowski, R., Pain, N., Rusticelli, E., & Zwart, S. (2016). The Economic Consequences of Brexit: A Taxing Decision. OECD Economic Policy Papers, No. 16, OECD Publishing, Paris. Kynge, J. et al. (2017). Beijing’s Global Power Play—How China Rules the Waves. Financial Times, Online, January 12. Retrieved October 24, 2018, from https://ig.ft.com/sites/china-ports/. Merics. (2018). Mercator Institute for China Studies. Retrieved from https:// www.merics.org/en/bri-tracker/mapping-the-belt-and-road-initiative. MGI. (2016, March). Digital Globalization—The New Era of Global Flows. McKinsey Global Institute, McKinsey & Company. OECD. (2013). International Migration Outlook 2013. Paris: OECD Publishing. Pepel-Srebrny, J. (2017, June). Government Borrowing Cost and Budget Deficits: Is Investment Spending Different? University of Oxford. Department of Economics Discussion Paper No. 827, Revised August 2018. United Nations. (2017). World Population Prospects—Key Findings and Advance Tables, 2017 Revision, Department of Economic and Social Affairs, Population Division. Working Paper ESA/P/WP//248. New  York: United Nations. Vandenbussche, H. (2018). US-EU Trade: The Cost of non-TTIP. Presented at EconPol Europe’s Annual Conference 2018, International Trade and Protectionism, November 18, Brussels. Wagner, H. (2017). The Building Up of New Imbalances in China: The Dilemma with ‘Rebalancing’. International Economics and Economic Policy, 14, 701–722. Zoller-Rydzek, B., & Felbermayr, G. (2018, November). Who is Paying for the Trade War with China? EconPol Policy Brief 11.

7 China Risks and Challenges

What would happen if the situation in 2050 would rather reflect the middle-income trap problems in China and India and thus scenario 2 in terms of global income? This leads the focus to an analysis of the middle-­ income trap problem (Eichengreen et al. 2013; Gill and Kharas 2007; Wagner 2017). In the paper by Eichengreen et al. (2013) , it is emphasized that sufficient investment in higher education—secondary and tertiary education—is an important element in avoiding a middle-income trap; moreover, a relatively high share of high-technology products also seems to help avoid that trap so that moving up the skill ladder and the technological ladder seems to be crucial. Rudengren et al. (2014) have pointed out that the process of democratization seems to contribute to the slowing down of economic growth which, to some extent, is a political science view that is consistent with the economic perspective of Eichengreen et al. who find that switching from autocracy to democracy seems to slow down economic growth. In a World Bank paper, Gill and Kharas (2015) have summarized part of the relevant research on the term they had coined a decade before. Eichengreen et al. (2013) have argued that China has invested considerably in higher education and also that the share of © The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6_7

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high technology in China’s exports is rising over time; however, one can still not be sure that this country will be able to avoid the middle-income trap. For sustained growth in China, it would be quite important to have broad access to the US, the EU and the ASEAN markets of the Association of Southeast Asian Nations. If the US were to continue President Trump’s approach of impairing Chinese high-tech exports to the US, this would probably slow down China’s economic catching up, but after 2025, the country should be able to surpass the $15,000 to $16,000 per capita income level identified by Eichengreen et al. (2013) as a critical threshold—they also identify a lower potential threshold of around $10,000/$11,000. It is obvious that information and communication technology (ICT) could play a considerable role for high-technology growth and high-tech exports. China has the advantage that both the network effects and the static and dynamic scale effects, which are relevant for certain ICT fields, can largely already be mobilized in the big home market. There is, however, one crucial caveat (Xing 2011), namely, that the value-added in Chinese high-tech export firms is often rather low, and export-processing indeed plays a crucial role in China’s high-­ tech exports. One may argue that ASEAN countries, including the high-tech Singapore and Malaysia with its strong ICT focus, might be in a position to contribute, along with Korea, Japan and India—the latter mainly through digital services exports—to considerable ICT exports from Asia. This concerns both intra- and extra-Asian exports. EU countries are likely to reinforce links with Asia, not only with China but with ASEAN and India as well. For example, in ASEAN countries, EU foreign direct investment stocks exceeded that of the US in 2017. However, China’s foreign direct investment flows, already showing high growth in the decade after 2000, may be expected to accelerate after 2018: protectionism by Trump’s US vis-à-vis China gives a strong incentive to reinforce outward FDI in ASEAN.  This, in turn, could stimulate oligopolistic interdependence reactions of multinational companies in some sectors—an old phenomenon (Knickerbocker 1973)—so that FDI inflows into ASEAN could accelerate. Singapore, Brunei Darussalam (a small but oil-rich country) and Malaysia had higher per capita (in purchasing power parity [PPP]) income than, for example, Bulgaria and Romania in 2017, which ­suggests

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that some ASEAN countries have already surpassed the potential middleincome trap (see Fig.  7.1). One may note that both Singapore and Malaysia have considerable ethnic Chinese minorities. Thailand might follow the leading ASEAN countries around 2025. From this perspective, China and ASEAN are not likely to face a medium-income trap. More difficult to assess is India. The share of ICT in output and exports in India is rising, but India has started relatively late to achieve considerable economic growth. Just how sustainable India’s economic growth could be remains an open question (OECD 2017). China’s political leadership had been impressed by the Western world’s winning of the Cold War and the demise of the socialist system in 1990/91. The historical political psychology in China is to admire an Gross Domestic Product Per Capita (Purchasing Power Parity) 120000 100000 80000 60000 40000 20000 0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Current international Dollars

140000

Brunei Darussalam

Bulgaria

Germany

Italy

Malaysia

Romania

Singapore

United States

Thailand

Fig. 7.1  Nominal per capita income in Germany, Italy and the US plus selected Eastern European and ASEAN countries (purchasing power parity). Source: EIIW calculations based on data available from the IMF Data Mapper, World Economic Outlook, October 2018

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economically and technologically dominant country so that China, after 1991, wanted to reinforce its cooperation with the West in the 1990s— and indeed this strategy continued until the US Banking Crisis of 2008. Only then did the Chinese government become more interested in reinforcing its cooperation with the EU. In addition, the plans for “One Belt One Road”—a new Silk Road—favored EU countries and possibly countries in Asia and Africa. Part of the new maritime Silk Road would be based on existing and new ports in Asia, and the maritime Silk Road naturally allowed to reinforce trade relations with Africa where China and Chinese firms bought large areas of land and also became major investors. In Africa, the main rivals were France and the UK plus the US. The UK and France have a long colonial history in Africa and parts of Asia. China’s leadership has understood in 2018 that the country will be quite vulnerable to US protectionism under Trump. The strategy of the Trump Administration to push China in various ways—temporarily denying access to US chip technology—and progressively raise import tariffs, in addition to import tariffs on steel and aluminum, is bound to encourage China to seek a political reorientation—less cooperation with the US. For China, the US was an admired partner before its banking crisis of 2007–2009, but in the course of that crisis, the US lost part of its global leadership position. China must seek some form of cooperation with Russia for practical security reasons, and both countries have a joint interest in not allowing a reunification of Korea. For China, the strategic disadvantages and the psychological defeat would be too obvious, while for Russia, the strategic perspectives of having the US military establish a foothold in the northern part of a reunified Korea are also undesirable. As regards economic cooperation, Russia is not a leading global partner. Clearly, the EU could play such a role provided that EU integration remains on course and no further Brexit cases would follow; this disintegration impetus, however, is precisely what the Trump Administration is aiming at. It is not unfair to say that Trump as a political layman—before being sworn in as US president in January 2017—has no broad strategic understanding of international economic relations and of the role of international organizations. He is apparently convinced that nationalism, sometimes dubbed patriotism, should be the natural policy orientation of the US and all other countries. The last time this view was shared by the leading countries of Europe was

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in the late nineteenth century, and there is not much doubt that a new global wave of populist nationalism would sooner or later lead to new international conflicts, possibly including military conflicts. China’s political and economic relations are shaped by the interest in getting access to the EU single market and—since the start of the Trump presidency—by using the EU as potential counterweight to the US. The earlier Chinese approach to the EU, under the heading “16+1”, which was viewed critically by the EU Commission, is likely to get a lower priority ranking in Beijing in the medium term. China’s main interest is in building a strong economic and political bridge to the EU27 which, however, it views as having been weakened through Brexit. The UK, once separated from the EU27, could rapidly become a simple target for China. With the UK facing reduced medium-term economic prospects post-Brexit, China has two new options: • Through a Sino-UK free trade agreement, the UK would increasingly become dependent on China in economic terms in the long run as China’s output growth rate is expected to exceed that of the US for at least two more decades. The conditions for Chinese market access to the UK should be rather favorable for China as the UK is economically and politically weakened through Brexit; its economic weight is one-fifth of the EU28 so that China will get much better conditions for UK market access than would have been the case if China had concluded an agreement with the EU28. While one may not exclude that a populist US administration might want to discourage a UK-­ Sino free trade agreement for strategic reasons, the strong interest of the UK to raise economic growth through more trade with China seems likely to be the overriding influence in the long run. • With the strong real pound depreciation in the course of Brexit, Chinese firms (often state-owned enterprises) face rather favorable conditions for taking over the British firms. The economic influence of China would thereby increase strongly in the medium term. Chinese firms could be eager to buy both industrial firms and service providers in the UK and also to expand its investment in the infrastructure ­sector. Electricity generation, transportation and other fields are of particular interest for China.

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• British universities will offer better conditions to students from Asia in the future as studying in the UK has become less attractive for EU27 students as well as for students from OECD partner countries post-­ Brexit. With political relations between the US and China weakening, China has already, to some extent, signaled in summer 2018 that fewer Chinese students would study at US universities in the future. The EU and China might see each other as rivals in Africa, but the regional foreign direct investment differentiation is broad enough in that region that EU and Chinese relations should not stumble over new fields of conflicts there. Finally, the EU will need the support of China to maintain the multilateral trading system. The combination of the EU, ASEAN, Mercosur, ECOWAS, China and some other countries could be strong enough to maintain a multilateral system. There is, however, the risk that the Trump Administration transforms the global system, step by step, into a managed, US-dominated system based on bilateralism. Japan, which had been hesitant to negotiate with the US about a possible free trade agreement—the hope was rather to get the US on board as a signatory to the Trans-Pacific Partnership (TPP) agreement—has, in October 2018, accepted to indeed start bilateral Japan-US talks. With the US providing the nuclear umbrella for so many countries in Asia, it was easy to push Korea to accept a revised trade agreement, and along the same logic, Japan and other countries could follow suit. The Trump Administration, however, will hardly be in a position to undermine the ASEAN group which itself is successful in its economic development and which is certainly a preferred new partner of China. With US-China trade relations worsening under the Trump Administration, Chinese firms have started to strongly raise foreign direct investment in ASEAN as the management of those firms hopes to be able to export from ASEAN countries to the US without serious impediment. This will become an indirect challenge for EU countries and EU foreign investors, which had so far held the leading position in the field of foreign direct investment in ASEAN. At the bottom line, one may expect that Chinese firms will be pushed by the Sino-US trade war to accelerate the creation of Asian production networks. This is a process that is facilitated by modern digital technologies as the ADB (2014) has shown in its analysis.

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Since China itself is a strong player in digital innovations, one may expect that China’s Asian production networks will indeed expand at an accelerated pace. With more technology-intensive and knowledge-intensive Chinese production established in ASEAN, China’s economic and political influence in this region is bound to increase. The presence of ethnic Chinese groups in Singapore, Malaysia and some other ASEAN countries could reinforce this Chinese networking. One may, however, argue that the free market-oriented Chinese bankers of Singapore—whose parent families fled from China in the 1960s—do not share the ideological views of the Chinese government. China’s efforts to reinforce its economic role in Asia partly are manifested in the One Belt One Road initiative: building a new or modernized infrastructure transportation network—the new Silk Road(s)—could help to generate more trade and to reinforce China’s political role in Asia. The Asian Infrastructure Investment Bank (AIIB), located in Beijing and to some extent dominated by China, offers favorable financing packages for various infrastructure projects in this context. One may note that the AIIB is one of the few international organizations in which China’s government takes a rather active role. For China, this multilateral policy perspective is a rather new option for its foreign and commercial policy.

New Global Governance Issues With the new populist approach in the US, the reliability of US economic policy is reduced (part of Trump’s bargaining strategy in many cases) and the role of international organizations will be weakened, which will imply higher governance costs in the world economy. From a politico-­ economic perspective, the implications of these developments are as follows: • Expectation formation will become more difficult in a world economy with its foundations comprising common international institutions having been weakened; for firms, higher risk premiums of production imply an upward shift of marginal cost curves so that a negative global output effect has to be expected.

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• The reduced reliability of the US Administration implies that international markets for tradables will be characterized by higher transaction costs, which means a downward rotation of the net demand curves in many markets. Both of these aspects imply a lower equilibrium output in an equilibrium in very many markets and thus a decline of real GDP and employment at the aggregate level. It seems that the Trump Administration wants higher political cooperation (implies: rising degree of political autonomy of partner countries) and more trade concessions from those countries that have traditionally enjoyed US military protection. The US could use the leverage of US banks and capital markets to more strongly impair the political autonomy of adversarial countries. Those countries facing a more open opposition from the US under President Trump than under previous US governments, in turn, are more likely to cooperate with each other. A key global player is China. As its economy is growing further and will have a gross domestic product which exceeds that of the US and the EU, the Chinese economy’s role as a leverage for Chinese political power will increase over time. At the same time, it is quite important from an EU perspective that China’s leading politicians embrace multilateralism. In this respect, China’s role in international organizations is important: China should recognize that contributing to the long-term activities of such organizations is the basis for long-term benefits of its own; moreover, the Asian Infrastructure Investment Bank is the first major multilateral bank that is seated in China and indeed it offers many opportunities for China, including the role of being a test bed for multilateralism; such politico-economic multilateralism is not a field in which China has a long history or much experience, just on the contrary. It is all the more important that China is encouraged to develop a broader active multilateral role within the AIIB by European partner countries. There will be no chance to maintain multilateralism if the EU and China do not cooperate in a world economy in which US populism is dismantling international organizations. For many EU countries, it will be a difficult political balancing act to maintain the traditionally good

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relations with the US while simultaneously developing much stronger political cooperation with China. It is clear that China would not expect EU countries to offer such cooperation with a broad willingness of EU countries to allow more Chinese foreign direct investment in the EU. A difficult area of potential cooperation at a global level is competition policy; while there is traditionally some cooperation between the US and the EU in the field of competition policy, the EU has not developed much cooperation with China. This, however, should be considered more carefully in the future. That the analytical approaches of the EU, China and the US are likely to differ considerably in many fields is obvious, but the logic of economic globalization, including digital globalization, clearly suggests that more cooperation in global competition policy is needed. Again, Sino-EU cooperation could be rather difficult, not least since the political approaches toward the Internet society are different in the EU and China.

References ADB. (2014). Asia and Global Production Networks—Implications for Trade, Incomes and Economic Vulnerability (B.  Ferrarini, D.  Hummels, & Asian Development Bank, Eds.). Cheltenham: Edward Elgar. Eichengreen, B., Park, D., & Shin, K. (2013). Growth Slowdowns Redux. Japan and the World Economy, 32, 65–84. Gill, I., & Kharas, H. (2007). An East Asian Renaissance: Ideas for Economic Growth. Washington, DC: World Bank. Gill, I., & Kharas, H. (2015). The Middle-Income Trap Turns Ten. Policy Research Working Paper 7403. Washington, DC: World Bank. https://doi. org/10.1596/1813-9450-7403. Knickerbocker, F. T. (1973). Oligopolistic Reaction and Multinational Enterprises. Cambridge, MA: Harvard University Press. OECD. (2017). OECD Economic Surveys: India, February 2017. Paris: OECD Publishing. Retrieved from https://www.oecd.org/eco/surveys/INDIA-2017OECD-economic-survey-overview.pdf. Rudengren, J., Rylander, L., & Casanova, C. R. (2014, May). It’s Democracy, Stupid: Reappraising the Middle-Income Trap. Institute for Security and Development Policy. Stockholm Paper.

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Wagner, H. (2017). The Building Up of New Imbalances in China: The Dilemma with ‘Rebalancing’. International Economics and Economic Policy, 14, 701–722. Xing, Y. (2011). China’s High-tech Exports: Myth and Reality. GRIPS Discussion Papers 11-05, National Graduate Institute for Policy Studies.

Part IV Policy Innovations and Systemic Reforms

8 Policy Conclusions for International Organizations

President Trump’s nationalistic policy orientation has an overlap with an established political current in the Republican Party to consider international organizations as doubtful institutions that cost taxpayers’ money and could impair US policy autonomy. It is quite obvious that President Trump gives only weak support to international organizations. The US Administration under President Trump could pull out of major international organizations such as regional multilateral banks (e.g. the Asian Development Bank [ADB] or the European Bank for Reconstruction and Development [EBRD]), arguing that any such membership costs the US taxpayer a lot of money and generates uncertain benefits for the US—actually often delivering greater benefits for other countries involved rather than for the US. For example, if the US would have a lower profile in the ADB, this would indirectly reinforce the role of Japan as the leading ADB country, on the one hand, and the role of the Asian Infrastructure Investment Bank (AIIB), on the other hand—with its seat in Beijing. The US is not a member of the AIIB, while many EU countries, including the UK, France and Germany are founding members. The idea that the US would gain from weakening the international organizations in which it mostly has a dominant role or could block major decisions is as © The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6_8

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­ nconvincing as the idea that the UK will gain international power by u pulling out of the European Union (EU28 is roughly five times the UK’s economic weight alone). Multilateralism means a rule-based international system with a crucial role for international organizations that help to implement international law. In the words of the Secretary General of the WTO—as expressed in a speech in 2017—multilateralism means “to make the small big and the big civilized”. The idea is that big powers that have tied their hands to the rule of international law would be a fairer partner for the large group of small countries in the world than otherwise. In international organizations, the small countries have—as a joint group of countries—a voice in international economic policy. The role of small countries is enhanced if the countries are part of a regional trade integration club. The bipolar order of the Cold War of 1944–1991 (the year when the Warsaw Pact and the Soviet Union dissolved) was one in which the world market economy was shaped by the United States and its political and military allies. The US leadership and the international organizations that had been created in 1944 (IMF/World Bank) and the following decades (e.g. the GATT in 1947: the World Trade Organization (WTO) in 1995) have helped to achieve the international public good “free trade” and “financial stability”. The OECD as an institution which helped to coordinate fiscal policy among industrialized countries—as did the G7 in an informal way—also played a role. However, the system failed in preventing the Transatlantic Banking crisis of 2007–2009, despite the fact that after the Asian crisis of 1997/98, the IMF had introduced the Financial Sector Assessment Program (FSAP), and despite the warnings of the Bank for International Settlements which, since the 1970s, has played a crucial role in designing rules for prudential supervision (the Basel Committee on Bank Supervision [BCBS] was created in 1974, the Basel Accord I rules for international banks were adopted in 1988, followed later by Basel II and Basel III). The system thus was augmented by an active G20—with a first meeting in November 2008 on the Transatlantic Banking Crisis—which brought China, India and other countries into a role of more shared international economic policy responsibility. However, the G20 is a rather heterogeneous group in terms of per capita income of member countries and the size of the countries involved.

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The list of promises enshrined in communiqués is long, but there is no clear track that the promises made were held—with the remarkable exception of the G20 Brisbane summit of 2014 when countries promised to increase real GDP by an extra 2% by 2019. A key question is which alternative international regime would emerge once international organizations have become rather unimportant, for example, by the US bypassing these institutions and what would be the economic and political consequences of such a development. It is most likely that a new grand power regime would be established—with the US, Russia and China being these grand powers and all other countries having to decide which of the grand powers they want to join as a political vassal. The South China Sea will become a major area of new conflict, with the UK and France also sending naval forces to the area, although one cannot easily understand what is at stake there for these two European countries. For China, this is a new situation, and it might have to accept some European military presence in the area since the key merchandise shipping routes between the EU and Asia will have to be protected by European countries. This will be all the more important as the EU-China and EU-ASEAN trade will grow in the long run, and since NATO is weakening so that Western European countries are less likely to rely on US military protection. A broader EU-China dialogue in all fields of policy would be useful, and it is obvious that the EU will push China to remain a supporter of multilateralism. A major problem of China’s international political role is that it has accumulated relatively limited experience in multilateralism over a very short time period, basically starting with WTO membership in 2001, followed by the new Chinese financial policy approach through the AIIB. Multilateralism has been based on international organizations as they were emerging in a small number in the late nineteenth century and in much greater number (and in expanded roles) after 1944. Historical globalization of the 1860s to 1914 created a rapidly growing network of trade and international capital flows, and at least in some fields—concerning, for example, postal service, telegraphy and patent protection— European countries plus the US and other countries joined forces to use international law and international organizations to facilitate the exchange of goods, knowledge and information. The leading country of the system

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was the UK which had lost its global economic leadership around 1900— with the US becoming the No. 1 in the world economy, but there was no political ambition in the US to play a continued international political role beyond fending off European intervention in Latin America (with the Monroe Doctrine stating the willingness of the US not to accept European interference). The Democratic President Woodrow Wilson, who led the US into World War I and pushed for a new international order in which the League of Nations should play a major role, did not manage to convince the US Senate to follow his plan for this new order so that the US stayed outside. The UK was too weak to provide strong international leadership, and Germany as well as Japan left the League of Nations in the 1930s. It was only in 1944 that the US adopted a new strategy and pushed for a multilateral order based on increasingly powerful international organizations—a strategy that included support for EU integration, a strategy that ended in 2017 with Trump taking office. One may notice that part of the Republican Party stands for a rather isolationist international position and certainly for a deep mistrust in the role of international organizations which are considered as being dominated by non-US countries and corrupt foreign governments that do not care much about efficient leadership and governance in international organizations.

Differentiated Economic Globalization It was only in the early 1970s that the UN recognized that the world economic order did not have an institutional design and was not shaped by principles that would encourage the economic catching-up of the South vis-à-vis the North. Taking a look at the early twenty-first century, one may emphasize that there has been much catching-up internationally since the 1970s in some parts of the world economy. This holds despite the fact that the UN was hardly successful in shaping a new world economic order. It was not so much changing institutions at the global level, but rather regional economic catching-up dynamics in Asian and Latin American newly industrialized countries (NICs) that helped to raise global growth for part of the world economy—with Asian NICs ­following

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Japan to some extent; Asian NICs’ export growth then contributed to worsening terms of trade of the socialist countries in Eastern Europe and the Soviet Union in the decades after 1970, until the Soviet Union and Eastern European socialist countries collapsed in 1989/90. In Eastern Europe, it took about two decades to organize broad and successful modernization of the post-socialist transition countries—with the European Union and the European Bank for Reconstruction and Development (EBRD) strongly contributing, as external forces, to the successful modernization of many countries. A revival of political nationalism went along with the post-socialist transformation in many countries of Eastern Europe which enjoyed the new found political freedom, namely, to no longer be a vassal state of the Soviet Union which had disintegrated in 1991. In Hungary and Poland, in particular, a new nationalism became visible after 1991, and in these countries, indeed, populism also started to grow. The role of international organizations has increased since the 1970s in some policy fields; however, it was not so much the global UN which oversaw the leading institutions, rather a strong role of the IMF and the World Trade Organization whose membership base could be widened not least after the collapse of the socialist countries. There was obviously a need for more international cooperation, with the US and the EU really pushing Eastern European countries to join the leading global institutions. In 1974, the UN adopted an action program for a New International Economic Order: the UN stated (James 2002) that the present order has not allowed to achieve long-term and stable economic dynamics. The gap between North and South is increasing, and the present system was created before developing countries existed; the current system was considered as to be likely to reinforce economic disparities in the world. Key elements of UN proposals were (i) support of producer organizations from less developed countries (LDCs); (ii) improving conditions for the transfer of financial resources to LDCs. In a special general assembly, there was a debate about a UN Charter of economic rights and duties of member countries. While the UN did not contribute much to international economic catching-up in the 1970s, it was more successful in pushing the topic of environmental modernization—with the Stockholm conference of 1972.

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The state of the environment became part of the policy approach of OECD countries and actually of most UN countries in the decades following; even China, the new economic giant in the early twenty-first century, came on board for green modernization and signed the Paris Protocol designed to fight global warming. It was the US under President Trump which became the first OECD country that pulled out of the Paris Protocol. China itself had become part of the global market economy after opening up in 1978 and finally joining the World Trade Organization in 2001. However, China is not a small open economy whose opening up creates marginal adjustment burdens for its partner countries. For some of these countries, at least in some sectors, the strong growth of China’s exports has created significant adjustment pressures. It is not easy to address the key problems of persistent extreme poverty, environmental problems and economic injustice; Sachs (2015) has presented many useful ideas and approaches for a sustainable development that could bring combined progress in several of the aforementioned fields. The idea of solving international conflicts trough international law goes back to modern history, particularly to the German philosopher Immanuel Kant (1795) who wrote an influential booklet titled Zum Ewigen Frieden/Perpetual Peace: A Philosophical Sketch. He argued that this could be reached by responsible government in republics, treaties between countries would help to achieve perpetual peace and no secret clauses within peace treaties would be allowed. Woodrow Wilson, the US president who helped to create the League of Nations after World War I—although the US itself did not wish to participate as the vote in Congress showed—was clearly inspired by the thoughts of Kant who was convinced that a democratic country, a republic, would be very hesitant to go to war. The idea of Kant that peaceful cooperation among countries would be in the interest of all countries was shared by David Ricardo who emphasized that trade between countries was one element to reinforce peace. It is, however, obvious that only growing trade is a necessary condition for peace. At the same time, there are clear arguments that declining trade intensity could undermine peace and raise the risk of war. Thus, countries pushing for protectionism are not only causing negative welfare effects but also are likely to undermine peace in the long run.

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For the majority of small countries in Asia, Europe, Latin America and Africa, the system of international organizations and multilateralism is very valuable, as it was also for the US over decades. China seems to support multilateralism, and the creation of the Asian Infrastructure Investment Bank—with its seat in Beijing—has been a key step toward a more multilateral (and also regional) approach in China. The US under Obama had adopted TPP in order to create an American-Asian regional integration network that should also establish a counterbalance to China, but Trump had quite different views, or he simply did not understand the logic of TPP and of TTIP. One should note that TTIP—and in a less pronounced way TPP—stand for deep integration approaches that generate benefits in the form of higher trade, higher FDI flows and an acceleration of innovation dynamics in the countries concerned (see on TTIP: Jungmittag and Welfens 2016; the authors use a knowledge production function to analyze the key points of TTIP—and beyond this use a macro-production function). With President Trump, from the non-tradables sector, weakening multilateralism in many ways, the question has to be raised: whither multilateralism? The EU, China and ASEAN are three supporters of multilateralism. For China, a serious leadership role in this context is quite unusual, and it is not clear how strong China’s role could be here. The EU27 will be weakened after Brexit, but it could join political and economic forces with the other regional single market in the world economy, namely, ASEAN, and push for a very broad cooperation and joint transregional liberalization, for example, in the Mercosur-EU-ASEAN triangle. If one would include China in a reliable way, one could imagine that the trilateral regional integration club plus China could be strong enough to fend off Trump’s bilateralism and his determination to bury international organizations (not only is the WTO on his list for phasing-­ out, but the Trump Administration has also been very hesitant in 2017 to support the BIS, not to mention leaving the Paris Climate Convention in 2017 and leaving the UN Humanitarian Rights Convention in 2018). To fight international cooperation was a hallmark of the nationalism in Germany and Japan in the 1930s. In the early twenty-first century, digital modernization and global networking are crucial for all countries—possibly with the exception of North Korea. In the digital field, the ITU (Geneva) should play a more active role.

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One should not overlook opportunities to consider comparative regional integration analysis and to possibly develop interregional networking initiatives that could, in principle, lead in the end to a worldwide network of formal or informal cooperation. One can also identify particular successful policy reforms that could serve as a basis for encouraging reforms in other countries. Moreover, as digital expansion is a global phenomenon—as much as the problem of global warming which thus calls for UN activities in order to create a global public good, namely, climate mitigation—one could also particularly consider certain fields of digital rule-setting with global relevance: for example, global competition policy and the provision of global data security; sufficient telecommunications network investment as well as digital innovation dynamics—often with positive international/global spillover effects—are important as is avoiding global negative international digital spillovers (the Internet-­based diffusion of viruses or trojans). Millions of unsafe Internet WiFi networks in hotels—with access offered to guests for free—are part of the problem; these unsafe WiFi connections should be heavily taxed by all governments and countries which refuse to effectively forbid unsafe WiFi-connections should face economic sanctions which could, however, be implemented only if all UN member countries would pay upfront a certain deposit into an escrow account of the UN. The World Bank’s capacity-building experience could be very helpful in building more safe digital networks around the world. Adequate immigration policy partly could help to contribute to North-South economic convergence.

References James, H. (2002). The End of Globalization: Lessons from the Great Depression. Cambridge, MA: Harvard University Press. Jungmittag, A., & Welfens, P.  J. J. (2016). Beyond EU-US Trade Dynamics: TTIP Effects Related to Foreign Direct Investment and Innovation. EIIW Discussion Paper No. 212. Retrieved from http://www.eiiw.eu/fileadmin/eiiw/ Daten/Publikationen/Gelbe_Reihe/disbei212.pdf. Kant, I. (1795). Zum ewigen Frieden. Ein philosophischer Entwurf [Perpetual Peace: A Philosophical Sketch]. Nicolovius. Sachs, J. (2015). The Age of Sustainable Development. New  York: Columbia University Press.

9 International Policy Conclusions

If the largest OECD economy, the US, is facing a structural populism problem, one should not consider a national policy reform perspective alone due to the size of the US and the many international spillover effects it would generate; some of them will come incidentally, others systematically through trade and investment mechanisms, as well as those impulses that would stem from the ideological export of US populism. The latter means that the nationalist and protectionist policy approach of the US would find countries in Europe and elsewhere which are willing to imitate the US policy course, and this is bound to create new conflicts within Europe and elsewhere. A US policy that is nationalist, protectionist, antiimmigration and anti-multilateralist would send strongly destabilizing signals to the world economic order; the new US approach and declining financial contributions to international organizations mean that the UN, the IMF, the World Bank, regional multilateral banks such as the Asian Development Bank and the EBRD in London, as well as the Bank for International Settlements, the OECD and the ILO would be likely victims. For the EU, a return back to nationalism and protectionism could not mean that the British emphasis on maintaining free trade would be the motto of most countries, but creating new and old groups of regional © The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6_9

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leadership and new political rivalries within Europe once the EU has been broken apart. Germany is likely to pursue some new “Mitteleuropa” strategy where it would assume the role of the regional center without any support. In such a new regime, some countries would gain relative power for a time where the UK would try to create a new network group with Scandinavian countries, Switzerland. France would most likely seek to create a Mediterranean influence group which could include Portugal, Spain, Italy and Greece. Russia would again seek to exert a strong influence on countries in the Balkans, and China would be a new actor in Europe, compared to the nineteenth century. China would have some influence on certain countries in Eastern Europe and the Balkans and thus could get into a conflict with Russia and potentially also with Germany following its new “Middle Europe” policy. China would build on its relatively young 16+1 cooperation format which is an initiative with a focus on 11 Eastern European EU members and five Balkan countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia). The main areas of cooperation envisaged in the 16+1 approach are infrastructure investment/transport, finance, science and education/culture. Within the framework of the initiative, China has emphasized three key areas for economic cooperation: infrastructure, high technologies and green technologies. China would have to cooperate with Russia to a certain degree since all Western Europe-China trade transported by rail would pass through Russian territory. If there would be an intensifying US-Sino political and military rivalry, China would no longer want to put a clear priority in terms of commercial transportation on the maritime links between China and Western Europe—too great would be the potential threat to these transportation routes through areas dominated by US naval power. The rivalries emerging would be more complex than in the late nineteenth century, which is known to have ended in World War I. The key requirements for avoiding a remake of the nineteenth century in Europe are to maintain the process of European integration and to roll back populism in the US. According to the analysis presented herein, the main driver of populism in the USA is a structural contradiction between the

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perception of an increasingly uneven and unjust income distribution in the US and the lack of effective remedies to deal with this situation. It is obvious that President Trump could generate some moral suasion pressure on some big companies, for example, Amazon, to raise their lowest wage bracket— Amazon indeed raised the minimum wage paid in the US in October 2018 (and it also raised the minimum wage in the UK: with a top-up in London exceeding the new company-wide minimum wage in the rest of the UK). However, such selective policy intervention cannot replace what would be necessary to achieve a less unequal income and wealth distribution in the US. Adequate policy options could consider the following four aspects: • The US Administration could create a rule on the transparency of remuneration of companies so that every company would have to publish the remuneration of top managers relative to the lowest wage bracket. Such information should be available on the Internet and must be based on data certified by the companies themselves. There is a risk that some companies could eliminate very low wage brackets and thus also eliminate poorly paid jobs, but this risk is rather modest and empirical evidence could then be a basis for final reforms here. • The US might want to consider moving away from a pure shareholder economy to what is a stakeholder economy model; some form of workers’ interest representation or of trade union influence would have to be considered. • The US government could increase the federal minimum wage which is fairly low. • The US government should not accept artificial wage limits as set in Mexico as a result of certain strange union practices which prevent wage increases in US subsidiaries. Other countries concluding free trade agreements should never accept artificial limits on factor remuneration in the host country—such limits run absolutely counter to the normal wage and adjustment dynamics which are usually observed in competitive economies (with rather limited corruption). • The US should revert to supporting the OECD Base Erosion and Profit Shifting (BEPS) initiative which should help bring about more equal and fair taxation across countries. The Trump tax reform has in effect been equivalent to weakening the BEPS initiative of the OECD.

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A serious problem of the US Administration is the emphasis on bilateralism and indeed an anti-multilateralist policy agenda. The idea of President Trump to have an advantage for the US through bilateralism is an illusion on three counts: • Seriously weakening and indeed destroying the system of international organizations—with so many dominated or at least strongly influenced by the US—amounts to a high depreciation rate of organizational capital and institutional reputation which have facilitated the formation of expectations of market participants and politicians worldwide for decades (Tilly and Welfens 2000). Without such an institutional anchoring of the behavior of countries and the expectations of firms and countries through international organizations, government actions in many countries could become less predictable and more radical, hence more conflict-prone. • The world economy has been organized through regional organizations (e.g. the EU, ASEAN, Mercosur or the regional development banks, including the EBRD and the ADB) in groups of countries; such groups could also be identified with global organizations; both regional and global organizations have been useful in solving international conflicts (e.g. in the field of trade). Each group has some internal leadership, be it formal or informal. The US influence at the global level has been predominantly based on US power itself, but also on generating political support of whole groups of countries rather easily—communication with the respective leadership was often quite helpful: hence, the US Administration saved many political resources through this strategy. A purely bilateralist policy would have to coax or push more or less all individual countries into supporting the US which is a costly process and which can easily lead to inconsistent actions as this approach is very complex and time-consuming. US populism is likely to continue to be a major challenge for many years to come. It would be good if scientists could become more visible on the Internet and if scientific institutions could better explain the key insights from their respective fields in order to reduce public confusion in the context of fake digital information and news.

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Perspectives This study has shown that Trumpism/US populism is likely not to be a short-term, transitory problem but rather a structural challenge for the US and the Western world as well as the global economy. Once the notion of structural Trumpism is broadly recognized in Europe, Asia, Africa, Latin America and Australia, there will be an almost immediate repositioning of both international economic policy and foreign policy outside the US. It makes all the difference in terms of international policy approaches vis-à-vis the US whether or not the US stands for a transitory period of political populism, protectionism and anti-multilateralism. If US populism is to become a rather long-term development, that is, a structural phenomenon, China and the EU, as well as other countries, will seek a broad reorientation of political cooperation with the US. Transatlantic cooperation will weaken, and only UK-US political and economic links are likely to intensify post-Brexit. NATO is likely to be seriously weakened and could indeed collapse which would be a disaster for EU countries’ security; at the same time, populist forces in the US could try to undermine the European Union so that the UK would not remain the only country leaving the EU. If such tendencies should emerge, along with a long-run US weakening of international organizations—from the WTO to the OECD, and the Bank for International Settlements to the UN—the world economy would move back to a modified nineteenth-century regime of Great Powers: with the US, China and Russia emerging as the three leading countries, with all other Western and Eastern European countries facing the decision of becoming a quasi-­ vassal state of one these three big powers. There are clear arguments to assume that Trumpism could indeed become a structural phenomenon in the US.  With the relatively large poor strata of US society hoping in vain that initiatives spearheaded by big companies would correct the significant inequalities that have emerged since the 1980s, and which are considered as unfair, there will be a broad and growing sense of frustration among the lower half of US income earners, while the life expectancy of white workers in the US continues to decline as Deaton (2015) has shown. The Democratic candidate in the presidential election campaign of 2016 did not have much

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to offer to those people earning less than $30,000: Hillary Clinton obtained 10% lower share of the votes from that group than President Obama had secured; with 53%, the share was too low to win the presidential election. Trump’s economic policy has created new jobs, and his emphasis on patriotism and nationalism is reinforcing support for his presidency amongst those who voted for him. His protectionist policy is designed to rally his supporters behind him, but at the same time, his trade policy is inconsistent und unlikely to generate benefits beyond short-term support for some manufacturing sectors and coal mining. This protectionist policy approach on the part of a Republican US president is, however, a contradiction since traditionally the Republican Party has been in favor of free trade. There could be a paradox of the endogenous reinforcing of US populism through a combination of anti-globalization policy from the Trump Administration (and other populist presidents that could come to power in the future) and the rise of international per capita differences as the consequence of reduced globalization. The latter normally contributes to the economic catching-up of poor countries vis-à-vis the North/the US; hence, weaker globalization raises international per capita differences between the US and its southern neighbors in Latin America—with Venezuela standing for a special problem of poverty which is being politically self-imposed. Rising per capita differences between the US and Latin American countries will stimulate higher immigration pressure on the US, and this, in turn, lends Trump’s populism yet more support when he (and his populist successors) will call for reduced immigration, including “chain-immigration” which is the situation when immigrants to the US give support to relatives from abroad so that they could also get visas and come to the US. With more populist governments in place in the Western world, for example, in the US, Brazil, Italy and in some Eastern European countries—and a populist May government pushing for the historical Brexit—the Western world is moving toward more nationalism, less cooperation and new international conflicts. The protectionist trade policy of President Trump has a strong focus against China. However, in the highly interdependent US-China-EU global triangle, Sino-US trade conflicts will have negative spillover effects on the European Union and on other countries as well. What at first sight

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looks like a bilateral Sino-US trade conflict is bound to become a global trade conflict as China will seek to redirect parts of its large exports to the US, to ASEAN countries and to the EU instead. Moreover, countries facing higher imports from China in critical sectors will impose their own import barriers vis-à-vis China in order to fend off strong downward price pressure from rapidly rising Chinese imports (e.g. Canada with its new barriers of autumn 2018 against steel and aluminum imports from other countries—once that Trump had imposed steel and aluminum import tariffs in early 2018). With the three actors of the US, China and EU28 being of roughly equal economic size and strong trade, and considering the international investment relations between them, bilateral trade conflicts are highly likely to become global trade conflicts. As Bob Woodward’s book shows, President Trump’s trade policy views are based on 30-year-old perceptions of Donald Trump and are certainly largely inadequate. Donald Trump is a successful entrepreneur from the non-tradables sector, namely, the construction industry. His grasp of international economics is rather weak—despite a few university courses in Economics—and he pushed Gary Cohn, the former president and chief operating officer of Goldman Sachs, to resign in 2018, as Cohn would not support the strange new US import tariffs on steel and aluminum. The implementation of these import tariffs was justified citing reasons of national security; this, however, is clearly a political lie. The traditional transatlantic political cooperation established over more than six decades post-1945 is likely to enter a new era; new uncertainty and additional political risks can now be observed. All of this is compounded by the British Brexit which is based on a disorderly 2016 referendum on EU membership and which has some bizarre side effects: while Brexit is clearly going to make financial markets nervous in 2018/19—and as most experts expect lower UK growth for many years post-Brexit—there is somewhat of a code of professional silence as leading international institutions and many central banks have adopted a blank paper information policy: the Bank for International Settlements has published its annual report in 2018 without a single chapter on Brexit-related risks, while the European Systemic Risk Board of the EU28—created in 2010 to prepare macroprudential analysis and make suggestions on how to reduce macroprudential risks—has been largely silent on the topic of

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Brexit in its report of 2018; the Bank of England apparently did not cooperate in a broad and normal way in 2017/18 when Brexit should have been a joint research and deliberation topic (instead, the main research focus of the ESRB in 2017 was shadow banking). The Western world’s rationality is in a critical state; this phase had obviously already started when the Transatlantic Banking Crisis revealed so many institutional and political weaknesses in the US, the UK as well as in some continental EU countries. Since the end of the Cold War, the US and other western countries, including the UK, have adopted new versions of super-capitalism since the 1990s: with enormous degrees of freedom for banks and pharmaceutical companies. It is also noteworthy that the quality of economic research in some fields has become rather weak in some countries, and this does not only concern the non-forecasting of the Great Recession 2008/09 which was a problem in the US, the UK and Germany. Additionally, it is no wonder that homegrown populism is rising in Germany when poor government policy in key fields is observed and affecting millions of voters negatively. There is no doubt that the populist right-wing AfD is a party that faces low-hanging political fruits in Germany and combines voter frustration—often mainly concerning immigration issues/refugee policy—over weak and inconsistent policy fields of government. The AfD party program itself is quite inconsistent and partly just wishful thinking and right-wing ideology. However, in the age of the Internet, populist radical parties have new opportunities to expand, and the victory of Trump in the US in 2016 has encouraged all radical populist groups in Europe. The pressure on traditional middle-of-the-road parties to deliver visible successes in terms of reforming the respective country is rising in many OECD countries. Explaining economic problems in a largely understandable way to a broader audience in a digital format should be considered as a welcome challenge for economists. If such economic d ­ igital enlightenment is not offered, all kinds of radical groups with poor understanding of economic problems will increasingly become the influencers in the digital world that will ultimately transform the real world. Since the Internet is associated with strong network effects, websites specializing in “fake news” and misinformation can create large negative national and international spillover effects. The standard remedy in textbook

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Economics would be a Pigou tax on those platforms that are the source of deliberate false information. Such a tax could not easily be imposed in a Western democracy where free speech naturally is a crucial element of the system and a freedom of the individual. It would be all the more important that independent rating expert groups would start to reward quality digital information platforms via some transparent procedure. Introducing private digital property rights should also be considered as part of a new policy that would emphasize quality in the Internet. The Internet is the decisive communication and information platform in the early twentyfirst century, and radical populist groups in many countries are about to aggressively conquer this largely unregulated sphere. As regard the US inequality, the key drivers of inequality, namely, growth in terms of China’s exports, financial globalization and digitalization, will continue. The share of the lower half of income earners in national income could fall to less than 10% by 2030. Such destabilizing economic-political dynamics could be avoided only if the federal government would adopt several reforms, including a higher minimum wage, higher tax rates on very high incomes and better international cooperation in tax policy to make sure that that incomes accruing from abroad are adequately taxed and that some minimum corporate tax rate is imposed in the G20 group. However, such international cooperation in tax policy is not to be expected in an atmosphere of rising protectionism and nationalism. EU countries could try to export the Social Market Economy model from Europe to Asia and North America. This might be possible if the European Union, weakened by the Brexit majority in the UK in 2016, would adopt adequate reforms and cooperate more strongly with other regional integration groups such as ASEAN, Mercosur and ECOWAS. This, in turn, would require much stronger cooperation between Germany and France, as well as other EU countries, and the European Union’s budget would have to increase so that voters at European elections would get a much better understanding of those fields in which the EU is important from a policy perspective—for example, in the future, this could possibly involve European infrastructure projects as well as parts of expenditures in defense and in consumer protection—and even some minimal redistribution activities. Fiscal federalism suggests that redistribution should be assigned largely to the highest/supranational

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policy level. The overall tax rate should then fall due to efficiency gains. It would be quite difficult to find a majority in support of such reforms in EU countries, not least because nationalism is gaining more influence in some of the European Union member countries; this will weaken the political willingness to shift competences and budget elements from the national policy layer to the supranational policy layer. That other EU reforms, including less regulation in certain fields and reducing bureaucracy, as well as reinforcing democracy and thus reinforcing the role of the European Parliament, are also important goes almost without saying. With the weakening of the EU from within and the new populist pressure from the US, EU integration will face many challenges in the years to come.

Further Perspectives The twenty-first century will be shaped by the US and China, two very big countries. For the US, this situation is rather new since the previous rivalry with the Soviet Union during the Cold War was about military and political rivalry, but an international economic rivalry was certainly not to the forefront of that conflict. As regards the US, succeeding in a military rivalry with China is not very difficult since China’s global trade links cannot be protected by the People’s Republic directly; 80–90% of world trade is transported on ships, and therefore control of ports worldwide is crucial. The geographic position of the US, with one coast on the Atlantic and the other on the Pacific Ocean, is rather comfortable, while China’s naval forces are not really able to protect China’s global merchandise trading routes. China, however, has a much greater population than the US. This creates an interesting position for the EU provided that the European Union/the Eurozone could move toward a political union. A divided EU would probably disintegrate over time, and Europe might fall back into political instability. If the Europeans can adopt adequate reforms, the EU27—with about 450 million inhabitants—should be able to defend multilateralism and to export institutional framework of the Social Market Economy. Viewed from outside, Chinese society is characterized by considerable economic inequality. However, the Chinese themselves have a rather

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broad view of social equality. There is considerable respect in each stratum for most other strata of society. This might facilitate cooperation with the European Union and the other countries which have a Social Market Economy. The greatest risk to the global position of the US would be a long-term sharp internal political division of the type that has become visible under President Trump; thus, there is a serious risk of structural US populism. Finally, one should not underestimate the risk to global stability that would emerge if a populist US would undermine or even leave the leading international organizations. The result would be a lack of international governance and stability, and hence lower global growth and also weaker international cooperation, for example, in terms of environmental policy. Thus, a concerted international campaign to tackle global warming in a timely manner might become impossible.

 hy Defending the Western Liberal Order Is W Crucial—New Proposals The traditional Western liberal democracy and the market economy have come under attack in the Internet age which is also the age of China’s economic expansion and following the Cold War. The Western countries have given up much of the previous political discipline which used to be a natural element of government in Western countries. During the Cold War, when US leadership was strong and strict and the dominating topic of security shaped all policies in Western OECD countries, there was a broad but implicit consensus that stable government and sustained economic growth should be realized by all NATO countries. No EU country with NATO membership would have dared to adopt a risky fiscal and debt policy as was the case in the election year 2009 in Greece when a conservative Greek government tried to “borrow an election win” through an absurdly high deficit-GDP ratio of 15% in 2009, while notifying the European Commission of a deficit of just 4% in early 2009. In any event, the strategy did not work as the socialist opposition party won the election, but by late summer 2009, Greece had lost access to the international capital market. Greece already had a debt-GDP ratio of 110% in 2009, and therefore to incur a deficit-GDP ratio of 15% was totally irresponsible

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in the year which followed the collapse of Lehman Brothers investment bank in the US and the associated clearly visible decline of risk appetite in international capital markets. Since it is known from economic history that no country will be able to cut the deficit-GDP ratio by more than 3 percentage points within one year, a 15% deficit-GDP ratio—the true figure became clear only in late 2009—was an implicit programming of much higher indebtedness for years to come. Thus, the 15% deficit-GDP ratio in 2009 implied a time series for that ratio—under favorable conditions—of 15, 12, 9, 6, 3 and 0%, respectively, so that the Greek debtGDP ratio would increase from 110 to 155% within five years. With 80% foreign indebtedness, this quickly amounted to Greece losing access to international capital markets. If such a disorderly deficit policy had been planned by Greece during the Cold War, the US would have mobilized the IMF early on to explain to the Greek government that a very high deficit was destabilizing both the Greek economy and the political system, and was, therefore, unacceptable; the Greek government would instead have adopted a rather low deficit-GDP ratio. Greece is only one case study, Portugal was another in 2009/10, while the Greek case, to a large extent, then created massive negative spillovers in fellow EU member Cyprus. As regards financial innovations in the EU in 2000 to 2008, it is noteworthy that financial product innovations have enormously increased in EU countries (see Table  9.1). Prudential supervisors did not intensify their supervision over the same period if one is to judge by the Bank of England’s Financial Stability Reports of 2007/08 (Bank of England 2007a, b, 2008a, b) and that of BaFin in its annual reports 2007/08 in Germany (BaFin 2007, 2008). Table 9.1  Financial product innovations in the EU (total), 2000–2014 EU28 (total) UK France Germany Spain Italy Ireland

2000

2004

2006

2008

2010

2012

2014

2862 410 159 662 122 125 N/A

1724 N/A 158 646 83 108 N/A

1375 N/A N/A 368 69 59 73

7430 N/A 519 1740 380 1232 212

2547 433 101 560 40 193 60

8155 1829 292 1403 186 875 178

6400 934 489 1154 199 696 230

Source: Own representation of data from European Commission’s Community Innovation Surveys

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Ireland, which is not a full NATO member, is an interesting case as the near economic collapse of Ireland in 2010 stood not only for an unprofessional Irish prudential supervision policy, but also for the failure of a global international organization, namely, the IMF, in 2006. In that year, the IMF (2006) published a Financial Sector Assessment Report (FSAP) update on Ireland which argued that there were no major problems in the Irish banking sector and only raised some concerns about stability problems in the reinsurance sector. This analysis was deeply flawed, as at that time almost all Irish banks’ balance sheets and off-balance sheet business would, considered together, imply that there were indeed serious risks for individual banks and a big risk of systemic instabilities which should have been easily recognized by the IMF expert group. However, the FSAP work of the IMF had numerous weak points, and this included Switzerland where the Swiss National Bank was assured by IMF representatives explaining the FSAP update a few years prior to 2008 that Switzerland’s largest bank UBS was a safe bank and that it was rather Switzerland’s second major bank which had some problems to be considered from a prudential supervisory perspective. In reality, it was just the other way around: in 2008, UBS, with its high exposure in the US market, had to be saved by the Swiss National Bank while facing about $50 billion in losses. UBS would otherwise have gone bankrupt, and its collapse would have brought about a sharp crisis in the real economy, read a very big recession in Switzerland. UBS was saved and in the end was able to repay its debt to the central bank, which shows that the Swiss National Bank’s intervention was adequate—UBS had a liquidity problem, not a solvency problem. Fiscal policy discretion and the political will to embrace broad banking deregulation had become rather significant after the end of the Cold War in Western Europe. The end of the Cold War brought a double problem: • The US indirect and direct political oversight over European NATO partners became weaker in the field of economic policy; • pressure in the US mounted in the 1990s that government would adopt a deregulation of banks—and once deregulated, the resulting higher profits of banks were partly invested into even more lobbying for further deregulation while banks also invested more resources into financial product innovations.

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It would have been appropriate to adopt some form of stricter fiscal policy supervision, for example, under the heading of Article IV IMF missions which take place annually. However, there was no such proposal from the G7/G8 and, as the Irish case of the miserable Financial Sector Assessment Program update of the IMF (IMF 2006) has shown, policy supervision was inadequate. The Transatlantic Banking Crisis did much to undermine the confidence of voters in the wisdom of the respective political systems and the ruling parties in many countries in the US and parts of Western Europe. It seemed incredible that billions of dollars or euro in government funds and taxpayers’ money could easily be mobilized to save banks with a history of bad and greedy management, while raising social security payments or transfers to poor households always seemed to be much more difficult for policymakers. For ordinary voters, it was hardly possible to understand the difference between the effective government funding of banks needed to avoid the bankruptcy of major banks—and thus to avoid a bank run and the collapse of the entire economic system—and the guarantees which governments in the US and Europe gave for the placement of banks’ bonds in capital markets which became an urgent challenge once a broader confidence crisis had affected the national banking systems in many countries after the collapse of the US investment bank Lehman Brothers in 2008. One of the strange findings in the two years immediately prior to September 15, 2008—the date of the bankruptcy of Lehman Brothers—was the fact that so many financial products (more than 60,000 in the US in early 2008) and banks in the US had a triple A rating: that the rating of Lehman Brothers was still AAA just a week before it went bankrupt shows in a nutshell that the rating process largely did not work properly; FDIC analysis clearly corroborated this after 2010 and thus highlighted that risk markets did not work properly in the US. Normally, one would expect that in a late economic upswing, with the low-hanging fruits for investment projects already harvested, that risk premiums would increase. However, in 2004–2006, just the opposite happened, as was emphasized by Goodhart (2008). Risk pricing was clearly inadequate and flawed in the US; at a rather late stage of the US economic cycle, the risk premiums (measured as corporate bond interest

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rates minus government bond interest rates for identical maturities and the same rating class) declined. Why? It is clear that this underpricing of risk brought an excessive demand for loans to finance too many risky projects, and when the high risks in the medium term finally became visible to everybody in the US in early 2008, the seed for a historical banking crisis had been sown and it finally erupted on September 15, 2008, when the US investment bank Lehman Brothers went bankrupt.

Policy Innovation for Unbiased Ratings The main reason for the underpricing of risk in 2004–2006 in the US was that banks—and firms—paid directly for the ratings of bonds which were to be placed in the capital market. This, of course, creates a conflict of interest on the part of ratings agencies. Too many ratings were biased and indeed much too favorable (or simply awarded on the basis of unprofessional work, as the Securities and Exchange Commission pointed out after the US banking crisis in a report [US SEC 2008]): too many favorable ratings had been awarded by rating companies which ultimately faced zero liability for artificially creating a stability risk in the US and parts of the EU. This problem, however, can be overcome as suggested by Welfens (2010), namely, through an institutional innovation: • Ratings should be organized as a two-stage process where all firms (or countries) needing a rating would put the respective rating task into a pool—a specialized pooling company would organize a tender on a big bundle of similar rating jobs, ideally one class of rating jobs: one rating company would then win the competitive tender, and all firms (or countries) that have put rating tasks into the pool would have to pay part of the rating bill, namely, on a pro rata basis, so that each firm (country) would face a fair share of the overall rating price. • The direct link between a company needing a rating and the rating agency doing the job would be cut and thus the traditional conflict of interest would no longer exist. Therefore, the quality of the rating process should, on average, be much better than in the traditional rating

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framework where the company seeks out a rating company and pays it a specific fee for doing the tender awarded. To avoid a new international banking crisis, a careful and improved organization of rating tasks is crucial. Unbiased ratings should give adequate signals for risk-pricing. Among the key reform requirements in Germany and other EU countries is the option of adopting a more efficient innovation promotion regime which discriminates less against small- and medium-sized firms than the often used approach of the direct subsidization of innovative firms. Rather, one should consider an indirect R&D promotion through tax benefits that adequately reflect innovation spillover effects of firms (Welfens et al. 1999). Not many fields would naturally qualify for promotion of research and development support from the European Commission at the supranational level: particular relevant fields are those where international innovation spillovers can be expected, for example, the fields of climate mitigation innovations and digital innovations as well as projects with a focus on reducing barriers to international trade for products whose production is characterized by learning-by-doing and dynamic economies of scale. As regards green modernization and climate policy, it seems that the EU countries are ahead of the US, not least due to the use of tradable emission permits whose price was close to €20 in late 2018; even China, after piloting a scheme of seven regional emission trading projects, had started a unified nationwide greenhouse gas tradable emission permit scheme in 2017, and prospects are good that this efficient policy instrument could be used in the whole of China in an efficient and effective way (Welfens et al. 2017). One should also consider that the global sustainability indicator shows a leading role for several EU countries, while the US does not hold a leading position in this indicator which combines the share of renewable energy, the genuine savings rate (a World Bank concept) and the relative advantage in environmental-friendly products (EIIW calculations, using OECD categorizations; see Welfens et al. 2015) (Table 9.2). The US could adopt some of Germany’s vocational training approaches in order to reduce the share of unskilled workers in the US workforce, and part of European countries health-care system would also be quite

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Table 9.2 Selected dynamics in sustainability: EIIW-vita global sustainability indictor values for selected countries Top 10 countries

EIIW GSI 2015

Bottom 10 Ranking countries

EIIW GSI 2015 Ranking

Nepal Germany China Tajikistan

0.336241735 0.321020954 0.284897073 0.256727925

1 2 3 4

−0.159060343 −0.16251382 −0.16785206 −0.171293916

134 135 136 137

Norway Iceland Costa Rica Lesotho Zambia

0.247831953 0.245624038 0.236945247 0.226688525 0.222713744

5 6 7 8 9

−0.181121715 −0.192447078 −0.196966013 −0.220374507 −0.221669212

138 139 140 141 142

Namibia US

0.210824917 10 0.061407472 39

Burkina Faso Uzbekistan Tunisia Trinidad and Tobago Oman Lebanon Yemen, Rep. Guinea-Bissau St. Vincent and the Grenadines The Gambia

−0.272062606 143

Note: Rankings based on EIIW-vita GSI (three inputs), for the results of a new extended EIIW-vita GSI Indicator (including the fourth input of water productivity), visit www.eiiw.eu Source: EIIW calculations

useful for the US. The federal government could encourage individual states to come up with 100% coverage solutions for health insurance (Massachusetts already has a broadly similar system in place) so that systemic competition could help to minimize the cost of health care, whereas broader health insurance would reduce US infant mortality rates while raising US life expectancy to Western EU countries’ levels. The Eurozone should adopt a more effective stabilization policy; with a strict debt brake in every member country of the Eurozone, but also with a Eurozone budget—which would include defense, EU infrastructure projects and possibly an unemployment insurance scheme which would provide maximum of six months benefits coverage organized as a partly joint project of the Eurozone countries. In such a setting, Eurobonds could be introduced, assuming that there is a Euro Area parliament and a Euro Area government (for more details on such reform proposals, see Welfens 2017b). It would be useful to restart a focused new TTIP project, that is, to recommence negotiations on a free trade area for the EU27 plus the UK and the US. The EU27 will come under pressure to adopt reforms post-Brexit, not least since once the UK has left the EU, it may be

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expected to join the free trade area EFTA and to push other EU countries to also leave the European Union. Denmark and Italy could be countries where governments might consider also leaving the EU in the near future. The share broad support for EU membership has fallen in some EU countries after 2016, and here Italy is a very important case indeed. China will be the big challenge for the US and the EU. The European Union might consider strongly reinforcing economic ties with China if the populist period in the US should continue for many years to come. One should not exclude that social policy preferences in the EU and ASEAN countries in the Association of Southeast Asian Nations are close enough to each other to allow enhanced international cooperation of the EU and ASEAN in the long run. Such enhanced cooperation between two regional integration groups each with a single market (and four freedoms: free trade in goods and services, free capital flows and free migration) could yield considerable benefits. The fact that per capita income levels in several ASEAN countries—in purchasing power parity figures— will have surpassed the poorest EU countries by 2025 could further encourage stronger EU-ASEAN cooperation in the future. This could reinforce the negotiation position of both the EU27 and of the ASEAN in negotiations with China and the US. It remains to be seen how international organizations will adjust to Brexit and to the Trump Administration’s strong protectionist pressures. A serious problem in the cooperation between the EU27, the UK and the US could concern the field of financial market regulations. The US and the UK will push toward deregulation in many ways, while the EU and the Eurozone may be expected to follow a rather strict regulation policy. This, however, does not exclude inefficiency problems in financial market and banking regulation in the EU27, not least because experienced supervisors for specialized financial services are rather difficult to find in the EU27—the financial market dynamics until late 2018 were such that the UK and the City of London were the leaders in the EU28 area. One cannot rule out that Brexit—largely a project with nationalistic, anti-multilateral and xenophobic connotations—will lead to further populism in the UK which, in turn, then could reinforce populism in the US. Populist governments in the US and Europe are likely to jumpstart nationalist populist forces elsewhere, including in developing countries.

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New conflicts are likely to emerge everywhere, a development that could endanger peace in many regions and worldwide, and to stimulate the expansion of companies involved in military-focused production in many countries. The largely naïve rhetoric of taking back control in the run-up to the Brexit vote in 2016 could, along with the election of US President Trump the same year, lead to new global instability and many new conflicts in the long run.

References BAFIN. (2007). BaFin Jahresbericht 2007 [Annual Report, German Financial Regulatory Authority]. BAFIN. (2008). BaFin Jahresbericht 2008 [Annual Report, German Financial Regulatory Authority]. Bank of England. (2007a, April). Financial Stability Report, Bank of England, Issue No. 21. Bank of England. (2007b, October). Financial Stability Report, Bank of England, Issue No. 22. Bank of England. (2008a, May). Financial Stability Report, Bank of England, Issue No. 23. Bank of England. (2008b, October). Financial Stability Report, Bank of England, Issue No. 24. Deaton, A. (2015). The Great Escape—Health, Wealth and the Origins of Inequality. Princeton: Princeton University Press. Goodhart, C.  A. E. (2008). The Background to the 2007 Financial Crisis. International Economics and Economic Policy, 4, 331–346. IMF. (2006, August). Ireland: Financial System Stability Assessment Update. IMF Country Report No. 06/292, Washington, DC: IMF. Tilly, R., & Welfens, P. J. J. (Eds.). (2000). Economic Globalization, International Organizations and Crisis Management, Contemporary and Historical Perspectives on Growth, Impact and Evolution of Major Organizations in an Interdependent World. Heidelberg: Springer. US SEC. (2008). Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies. Washington DC: United States Securities and Exchange Commission. Welfens, P. J. J. (2010). Transatlantic Banking Crisis: Analysis, Rating, Policy Issues. International Economics and Economic Policy, 7, 3–48.

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Welfens, P. J. J. (2017b). An Accidental BREXIT. London: Palgrave Macmillan. Welfens, P. J. J., Addison, J. T., Audretsch, D. B., Gries, T., & Grupp, H. (1999). Globalization, Economic Growth and Innovation Dynamics. Berlin and Heidelberg: Springer. Welfens, P. J. J., Perret, J. K., Irawan, T., & Yushkova, E. (2015). Towards Global Sustainability: Issues, New Indicators and Economic Policy. Switzerland: Springer International. Welfens, P. J. J., Yu, N., Hanrahan, D., & Geng, Y. (2017). The ETS in China and Europe: Dynamics, Policy Options and Global Sustainability Perspectives. International Economics and Economic Policy, 14(3), 517–535. https://doi. org/10.1007/s10368-017-0392-4.

10 Canada, the US and Eurozone: Implications for US Reforms

The US economy dominates that of Canada. Circa 75% of Canada’s exports go the US. Canada has a welfare state that is partly similar to that of EU countries; thus, the Canadian welfare state is more comprehensive than in the US. Wolff et al. (2012) have presented an important study on the comparison of inequality and living standards in Canada and the US.  The authors use an expanded measure of well-being (the “LIMEW” = Levy Institute Measure of Economic Well-Being) which follows the Canberra Group Report’s (2001) recommendation to consider a broader measure of economic well-being. By employing this broad measure, which included basic market income plus income from non-­housing wealth and household production plus government production minus tax payments, Wolff et al. find that in 2004/05, the LIMEW-Gini Index was only 28.5 in Canada, but 37.6 in the US. Looking at real disposable income per household in the US and Canada, Wolfson and Murphy (1998) found out that the bottom 35% of Canadian families were better off than their US counterparts. The study of Foster and Wolfson (2010) showed that inequality had increased in the US from 1979 to 1986, whereas there was a decrease of inequality in Canada from 1981 to 1987. Brandolini and Smeeding (2007) showed © The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6_10

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that the level of inequality in Canada has remained lower than in the US. Part of the difference between the two countries stems from the fact that government redistribution in Canada is stronger than in the US: in Canada, income inequality is reduced by 28%, whereas in the US it was found to be 23%. The Trump tax reform of 2017 has reinforced US inequality, as is emphasized by the IMF (2018, p.  21) in its country report on the US. Canada is an interesting country for comparison with the US in the field of social security and income redistribution. It is obviously possible to have close economic relations with the US but to rely on a broader welfare state and more public redistribution of income. The Canadian Gini coefficient (as an indicator for income inequality) for the market income of households was smaller at the beginning of the twenty-first century than the Gini coefficient in the US. Thus, one can have less inequality in market income and can achieve more income redistribution than the US—this is what Canada shows. The US government (president and Congress) could adopt some key reforms for reducing inequality in American society: • Simply putting more income redistribution on the political agenda would, however, not be wise in Washington, DC, as long as a relative majority still expects activity in this field not to come primarily from government but rather from big firms. • The leaders in the political system would first have to explain to the US public that nobody should expect that private companies (quoted on the stock market) would do much to reduce the level of inequality in the US. Certainly, with full employment achieved in early 2018, one may expect that some companies would raise the lowest wage brackets considerably, but profitable US companies are also likely to witness a strong rise of effective management compensation; this is what the US shareholder economy will bring as market-driven results, and hence inequality will not be corrected by the big companies themselves in any significant way. • At the same time, the theory of fiscal federalism (Oates 1999) suggests that effective income redistribution should be a federal task since realizing redistribution at the state level would stimulate high-income

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earners to move to other states while the poor people from many states would have an incentive to move to the “strongly redistributing” states—and this is not a sustainable policy approach. The high mobility of the people within the US would undermine any major attempt for redistribution at the state level, so that a centralized redistribution approach at the federal level would be appropriate. This could involve a tax reform whereby the rich strata of society would pay somewhat higher income rates, and indeed the relative tax benefits should be opposite to what Trump’s actual tax reform has brought, namely, a stronger polarization of post-tax income distribution: the IMF (2018, p.  21) has shown that the change in average effective tax rates for the median income is a bit less than −1.5% for the US median income position (that position which has 50% of income recipients above this income and 50% below this income figure), but almost −3% for the top 1% of income earners. The IMF wrote that “most U.S. households will see a reduction in their income tax in the new few years. However, the net effect of the tax policy changes—which also include reductions in the burden of the alternative minimum tax and a reduction in the marginal rate for higher income households—provides greater benefits to those in the upper deciles of the income distribution…As a result, these changes are likely to exacerbate income polarization.” It should also be noted that profits rates—as approximated by mark­up rates—have shown a tendency to increase in the US rather strongly since the 1980s, much more than in the Eurozone or Japan (IMF 2018, p. 30). It is not fully clear why the profit rates in the US and Canada (since 2004) have strongly increased, while remaining rather low in the Eurozone. One may assume that the larger and rising US share of information and communication technology in total output plays a decisive role. Network effects, in some subsectors combined with economies of scale, have raised barriers to entry in digital markets and ICT markets. Higher entry barriers then translate into higher profit rates. The expansion of ICT in the US, Europe, Asia and other regions of the world economy is likely to continue for many years to come, and hence the pressure for more income polarization could continue increasing in OECD countries as well as in newly industrializing countries.

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If the US would shift more toward a Canadian or continental EU welfare system, this would bring the following as the primary effects: • a reduction in terms of income polarization in the US, reduced voter frustration among the poor strata of society and reduced pressure for protectionism in the US as well as more support for sustained multilateralism; • the result, therefore, would be higher prosperity and stability in the US and worldwide, while the Western countries would face considerable opportunities to push for a minimum corporate tax rate at the G20 (I have made this proposal in a workshop at the German Ministry of Finance, in February 2018; Welfens 2018a). If the UK really leaves the European Union, it would be wise if the EU27 could convince the UK to cooperate with the EU27 in the field of social policy (if there would be a no-deal Brexit in March 2019, the UK would come under strong pressure to follow the populist US policy, which means, among other things, lower tax rates and the deregulation of financial markets which, in turn, would put enormous pressure on the EU27 to follow suit). The EU27/EU28 has a weak position in transatlantic and global negotiations as long as the EU has not been reformed, on the one hand, and as long as Italy’s problem of slow productivity growth has not been overcome, on the other hand. A similar view partly also holds with respect to Spain’s problems where the share of low-skilled workers is rather high—too high to successfully face a rising competition with China in global markets for knowledge-intensive and capital-­ intensive goods. The populist Conte government in Rome has not adopted productivity-enhancing and innovation-stimulating measures; rather, the main focus is on the demand side as the government wants to introduce a basic free income for everybody which, however, would have negative incentives for the supply of labor (and would reinforce the incentive for immigration). The high share of low-skilled workers in France is a double problem since it points both to challenges in the education and vocational training system of France and to the high national minimum wage, a minimum wage which in no way reflects the large regional price level differentials in

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France. France and Germany are the size of several US states, and both have a uniform national minimum wage; for 2016–2018, Germany had no serious problem as the minimum wage was about one-fifth times lower than in France, but as soon as the minimum wage rate in Germany would rise strongly, one may anticipate that the country would then also face high youth unemployment rates and more long-run unemployment. A negative earned income tax for the working poor is much better for employment and the government revenue. A free basic income leads to higher tax rates and is also not a focused instrument in European countries (OECD 2017). One should also consider that a generous basic income would certainly attract more immigrants from Africa and other regions, and the rising African population would make this instrument as a policy innovation in EU countries even more doubtful. One should not overlook that for demographic and family reasons, there might be a bigger need, for example, to support single-parent family households, but this then requires a clearly targeted and specific approach. Those proposing a basic income often overlook the incentive to change behavior—the percentage of people who will simply want to take the basic income but not work for this benefit will increase over time. The EU countries can learn from the US, for example, in the field of stabilization policy: the Eurozone could have a lower volatility of consumption per capita over time if the stabilization policy in the Eurozone would be more centralized and thus would follow more the US model (Allard et al. 2013). Other policy fields such as venture capital market development or innovation policy are also examples of areas where the EU countries should learn from the US example. The US, in turn, could learn from EU countries—probably from Western EU countries more than others—how to best organize broad health-care insurance and efficient social policies as well as income redistribution. There is also the question as to what extent more modest tuition fees to study for a bachelor degree could help the US to broaden its human capital basis in the long run. After the banking crisis, many US universities have strongly increased tuition fees. Stronger cooperation between the US and the European Union could be quite useful. If the economic order in the US would be closer to that of Canada or of leading EU countries, this would bring about reduced

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income polarization in the US. The majority of voters would no longer consider income inequality in the US to be a major problem. This, in turn, could help reduce the current ideological polarization which is a problem for many fields of political reform, namely, in the sense that practical compromises can hardly be achieved in a divisive and divided environment. The ideological polarization in the UK in the context of Brexit is also a serious problem. If there would be more cooperation among Western countries, the model of a Social Market Economy could diffuse more easily toward Asia. On the one hand, this could facilitate more cooperation between Western OECD countries and China, as well as other Asian countries, and help to maintain the multilateral system; on the other hand, populism would also be diminished in many countries.

Some Further Conclusions The US is a wealthy country, yet in 2017, about 15% of the population still had no health insurance coverage, while an additional 10% or so probably have insufficient health-care coverage in the sense that an instance of serious illness in the family would bring about a shift to poverty. In the EU28, plus Switzerland and Norway, about 98% of the population have health insurance, while Switzerland, Norway and all EU15 countries (Western Europe) also enjoy higher life expectancy and lower child mortality than in the US. Hence, the individual US states and the US federal government have a broad range of countries with health insurance systems that could be a good model for US reforms in general—not necessarily required for the state of Massachusetts which already has a rather successful and broad health insurance system. Too often, the debate in the US overlooks the negative effects of serious cases of illness on long-­ run output. The point is not so much that the US would have a high ratio of ill workers staying home rather than going to work. In the US, the problem is rather that many ill workers choose to take over-the-counter or prescription pain killers/opioids over months and even years, and then die early, instead of getting the necessary treatment in a timely manner— with the safety net of health insurance—and working for many more years in good health, and then retiring.

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As regards political risk management, there are many OECD countries with a poor performance: that neither the EU27 countries, nor the European Commission, nor even the UK’s own Cameron government sufficiently anticipated the result of the UK’s 2016 referendum on membership of the EU, and the subsequent Brexit, is one bad example. During a November 2016 visit to Chemnitz in eastern Germany, Chancellor Merkel herself referred to another obvious case, namely, that prior to the refugee wave that faced continental EU countries in 2015, the German government had not monitored the situation in the refugee camps in Lebanon and Jordan. Many poor Syrian refugees had found shelter in those camps in neighboring countries only to find out that donors such as the US and several rich Arab states had not actually paid over the funding to the United Nations that had been pledged. The result of this underfunding was that food rations in the UN administered camps were cut down to about one-half of the normal level—hence, millions of refugees started to flee from the refugee camps toward Turkey, and then to Greece and the EU. In the future, this type of monitoring of refugee movements and funding to provide for them should be carried out on a continuous and worldwide basis in order to avoid sudden nutritional crises in refugee camps and the ensuing destabilizing refugee waves. A similar challenge is in monitoring the quality of the rule of law—it should have been obvious for the US and other countries that the situation in Honduras and Nicaragua in 2017/18 was so bad that thousands of people would start to flee in the direction of the US as the desired regional emigration target. The populist Trump Administration would have a weaker argument in respect to introducing hyper-sharp immigration controls, if there were no sudden emigration waves driven by endemic crime in Latin American countries.

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 ransatlantic and Transpacific Health-Care T Dialogue—and New Prospects One should not assume that reforms of the US health-care and health insurance systems could easily adopt elements of European health-care and health insurance systems, or of other efficient systems abroad. The US is a large economy with circa 330 million people and 50 states so that naturally some variation could be expected across states—Massachusetts and Hawaii already have a rather comprehensive health insurance system, but many other states do not and a serious disease represents an economic disaster for a US family without health insurance. The Republican Party has traditionally emphasized that government should not interfere in the health-care system, but this should only be an argument to restrict the role of government in a rational way. The standard problems of asymmetric information (i.e. the patient knows very little, while the supply side knows much more in the medical system) and adverse selection (such as young, healthy people hoping to avoid health insurance costs) plus a lack of market transparency (e.g. hospital pricing lists in many US states) are key problems in US health-care markets. Almost nobody in the US questions the health insurance coverage of US veterans which is organized by government. One may not want to give government a bigger role, but one should also at least take a closer look at the example of Singapore where life expectancy is higher than in the US and health expenditures only one-third of that in US—about 5% of national income in Singapore versus 17% in the US. In Singapore, about 40% of health-­ care expenditures is from government. Singapore has 5 million inhabitants, but 800,000 medical tourists per year (US Commercial Service 2015). To some extent, Singapore is indeed a special case. It certainly has decided not to follow a free market Hong Kong-type economic policy. Rather, there is out-of pocket payment for simple cases and basic medicines; there is a government-required health savings plan for standard disease treatment, including hospital stays; there is a third element which involves a high risk insurance which would cover the treatment of very serious and complex diseases. Government plays a certain role on the hospital supply side, but there is also competition among hospitals, and

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the professional testing of medical devices also seems to be a well-­ established field (in this respect, Germany has been weak over decades, while the US is rather strong). The US should perhaps integrate a pillar with health-care foundations in a new health-care reform, and the federal system could provide the general guidelines within which US states could then develop their own state-level models with 99% health-care coverage. The aggregate effect would be a higher employment ratio and hence higher real national income, and thus a reduction of the ratio of health-care expenditures to income. In the current system, the US will face serious problems in the 2020s since the health-care expenditure to income ratio could rise to almost 20%. One may recommend less ideological and bipartisan barriers in both health-care system and health insurance reforms. Psychologically, it might not be easy for the politicians in big countries to consider examples from abroad—from both big and small countries, but this would mean that institutional learning is slow. However, it is worthwhile to adopt useful reform elements from abroad since the benefits could be very high. The portability of health insurance in the US is a major problem as long as health insurance is so often based on a certain job and employment with a particular firm. The globalization of the economy could mean that rational policy choices require more international institutional learning. As much as EU countries could learn many lessons from the US in the field of venture capital financing and digital innovation dynamics, for example, the US could also learn from some EU or ASEAN countries in the field of health insurance and income redistribution. Better health insurance means income creation, lower child mortality and longer average life expectance in the US as explained before. Populism in the US and Europe is likely to remain on the agenda for many years to come. Populism is a doubtful political current that builds on fear, identity issues (fear of immigration) and a new nationalism. US populism is a dangerous development because the Trump Administration (or its successors with a similar political orientation) will emphasize nationalism, the role of military power and protectionism; the US as a big country will try to export this new ideology. If it is successful in this endeavor, then it will lead to more global protectionism, new i­ nternational

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conflicts and hence less stability and less prosperity for all. It seems that the US and the UK have suffered for many years from rising inequality problems, but as long as the old elites were successful and neither country was facing a major economic crisis, both countries remained in the middle of the road politically. Only with the shock of the Transatlantic Banking Crisis, which startled complacent societies and raised so many new doubts about the old elites, could new populist ideas gain ground decisively—in the UK, this has resulted in the Brexit majority of 2016, and in the US, in the election victory of Donald Trump. Both Brexit and Trumpism stand for a combination of real-world problems and a new wave of wishful thinking, for a period in which the public is fed up with the view of experts as British Minister Michael Gove from the Cameron government said on British TV during the referendum campaign of 2016. Such a viewpoint suggests ignoring science which, however, is the basis of modern prosperity. The confidence in the ruling political and scientific elite has strongly eroded after the Transatlantic Banking Crisis of 2008/09. This is the paradox of the Western world: it has won the Cold War, but it has not been able to establish a stable modern politico-­ economic system within the first three decades after 1989. It remains to be seen whether or not the Western market economies can sufficiently learn from Western systemic competition; in any case, it will be a learning process facing the rise of the new economic giant—China. Digital social networks are a new element of the modern world. They facilitate access to information for everybody, but more importantly, they facilitate radical, often hate-fueled, positions in disseminating propaganda—offering the ability for small numbers of individuals to go online and build massive politically influential networked groups (with many of the followers actually unaware of who is leading the campaign). The political conjectures they spread often run counter to reality, and this points to a weakness of the established internet. It offers millions of sources of information, but there is no way to rate or rank information according to quality. This is a situation which would correspond to a real world in which there were no hotel ratings and hundreds of millions of tourists and business visitors would get very poor hotel accommodation. Thus, the creation of international foundations that could finance—in a transparent and scientific way—Internet information quality ratings

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would be crucial to establish a better quality of information in the digital net, to reduce radicalism and aggressiveness in political life and to contribute to a rational and peaceful world. For the US, the challenge of income redistribution remains crucial. The concept propounded by John Rawls in his book The Theory of Justice (Rawls 1971) is one that is still interesting for building a fair society: consider a hypothetical natural state of ignorance in which nobody knows her/his future position in society, which principles of social policy and redistribution policy, respectively, would one want to accept for the real world? The answer offered in Rawls’ book is that inequality is generally acceptable if the poorest strata of society also have a real income gain. In a dynamic perspective—viewed in a lifetime perspective—this, however, is not so easy to interpret as downward income mobility has some economic function, as do prospects of economic upward mobility. One may add that equal opportunity should be an additional aspect to be considered; however, in broader view of the real world, with global warming, this is a challenging concept. Global warming is a global public evil (“negative good”) that is the result of global production, heating and consumption. It remains a challenge how an effective and efficient climate policy in all countries of the world could be organized, and how not to roll back politically what thousands of leading researchers have found out about the sources of global warming is a particular challenge in the US. The debate about modern capitalism, globalization and democracy has new aspects through Trumpism and US populism, many of which are thorny elements for Economics and international economic analysis, respectively. The current economic rise of China may be expected to continue until about 2050 or 2060, and it is clear to some extent that both the EU and the US will face an increasing economic giant in Asia. China’s strong increase in industrial exports—reaching a global market share of about 20% in 2017 (up from 2% in 1990)—has been a challenge for sectoral and employment adjustment in the US and Germany/the EU. It seems that the US has not been successful in benefiting from the strongly rising exports to China, while Germany’s export growth has been rather strong in certain sectors (Dauth et al. 2017). A key issue of economic globalization—with a rising role of China—is whether or not the rising incomes

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of the “winner groups” in the US (or the EU) are contributing to rising tax revenues that, in turn, could be a basis to compensate the “loser groups” (Antras et al. 2017). Given the details of Trump’s tax reform of 2017, the top income earners will experience the highest relative benefit so that this tax reform is not in line with sustainable economic globalization. Moreover, as the Trump Administration has not provided special tax incentives to raise savings in the US, the tendency toward a negative US current account is reinforced. With the US imposing import tariffs on China (or the EU), there is a new macroeconomic problem for the US as retaliatory tariffs reduce the exports and profits of Chinese, Japanese, German or other foreign subsidiaries in the US—many of these firms have exports to China; hence, reinvested earnings in the US could shrink, and this will contribute to lower US savings, and this argument—that is, referring to lower savings through the reduced profits of subsidiaries—is also relevant for the UK, and its Brexit, which in effect is pushing the EU27 to impose import tariffs post-Brexit on UK exports so that the UK’s savings ratio could reduce after 2019 (Welfens 2018b). The mechanism here is that earnings/invested earnings of EU subsidiaries and US subsidiaries in the UK—with sales in the EU27—will fall post-Brexit, and this will reduce the UK’s aggregate savings ratio so that capital formation will slow down, on the one hand, and the current account could worsen, on the other hand. China’s export growth is part of economic globalization, and the Western world should find a rational way of coping with this. In Germany and some other European countries, including Switzerland, this seems to work better than in the US. If globalization in the North is slowed down, economic catching up in the South will also be slowed down so that immigration pressure toward the North will increase which, in turn, could reinforce anti-immigration populist groups in the political systems. It may be expected that the contradictions of populist economic policy— for example, in Italy—could sooner or later lead to a rollback of populist party influences. China was invited to join the World Trade Organization, and it became a member country in 2001. The rise of new global economic leaders is rarely without political and economic tensions, so nobody should expect that integrating China into the world market economy will be an easy

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development; not least since this integration takes place in the digital age of globalization—with Western countries and China having rather different approaches on how to regulate digital markets and the Internet. There should, however, be no doubt that more international trade and foreign direct investment are to the advantage of North America, Europe and Asia. If the Trump Administration wants to raise doubts about this— without any good reason—it will face the opposition of economists in the US and worldwide. Better rules for foreign direct investment could be useful at a multilateral level in order to make sure that there is no threat to security interests and that a broadly integrated capital market can emerge which will generate efficiency gains and international positive effects from innovation—possibly with a bigger international radius in many cases in the digital age (as compared to traditional industry); but the Trump Administration’s repudiation of multilateral arrangements— with allegations that multilateralism is an approach which is to the disadvantage of the US—is strange since this is largely counter to the facts and empirical evidence of international economics. It is no more convincing than the UK’s Brexit and the claim of Brexiteers that Brexit means to take back control—to shift power from the multilateral EU level in Brussels to the national level in London: post-Brexit, the UK would have more power about less—a smaller field of political relevance since the UK would have a broader field of influence through the much bigger EU28. Similarly, a US that undermines the role of international organizations will ultimately have less power over a hyper-complex field of international relations. For the Western world, much is at stake in dealing with the new globalization dynamics in a consistent way. Many countries in Asia and elsewhere are carefully observing whether the Western model of combining democracy, the rule of law and an open market economy can be maintained. Most continental European countries are also afraid that US economic policy could become increasingly unstable and difficult to anticipate (the UK’s Brexit project is of a similar problem). In the end, the Internet and social media will become a decisive intellectual battleground. The current Internet, without any quality ratings for news and other informative websites, is creating an opaque situation for information sourcing by ordinary people. It is obvious that the unspectacular and often not so easy to understand scientific analysis of

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economists and research institutions is losing ground online compared to the age of only newspapers and TV. Here, there is a broader challenge for the scientific community where researchers should try more often to explain in rather non-technical contributions what the key insights of economics and solid research are. One may hope that many foundations will be bold enough to consider the funding of such new digital enlightenment activities to be an innovative and relevant field of communication between science and society.

Selected EU Problems and OECD Perspectives The European Union stands for considerable success in economic and political integration. However, with the Brexit majority in the British EU referendum of 2016, the EU has suffered a historical defeat. This is a crucial point, even if the UK is likely to face high costs of leaving the EU and indeed relatively higher costs than the EU27. One of the most striking features of the Brexit majority in 2016 is not only that Prime Minister Cameron and member of his government were taken by surprise when they lost the EU referendum—the more shocking point is that the European Union and its leading member countries had not anticipated such an outcome. The EU, as do most of its member countries, lacks any professional risk management. While policymakers, for good reason, want big banks, for example, to have a comprehensive risk management in place in order to avoid any systemic crisis that might otherwise emerge from the bankruptcy of an individual large bank, the government of most OECD countries themselves do not seem to engage in much risk management vis-à-vis the national or international (EU) political system. This means that the formation of expectations in the political system is often slow and misguided, and adjustment measures are taken with considerable delay and with less efficiency or at higher cost than would be the case if some professional politico-economic risk management would take place. Even in a period of high political risk, namely 2017/18, within the EU, not even the European Systemic Risk Board (ESRB) was working the way it should according to the Board’s statutes, namely, to provide a comprehensive analysis of systemic risks—in this case with an obvious

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focus on Brexit—and to make proposals on how to minimize such risks; instead of all relevant parties sitting around the ESRB table and developing a joint analysis from the 53 member country institutions—including Iceland and Norway—with observer status (as members of the European Economic Area)—the division of labor roughly looked like this: The Bank of England looked into the macroprudential issues of the UK, the European Central Bank (ECB) in that of the Eurozone, as suggested by the Bank of England. This is inadequate and bodes ill for future EU-UK cooperation post-Brexit. It should also be obvious that a combined analysis of UK and 19 Eurozone countries adds up to 20 countries, while the EU consists of 28 countries. It seems that the European Commission does not have enough oversight over the ESRB and that the European Parliament has a very difficult job in pushing the ESRB to really follow its own mandate. The European Union faces considerable pressure for more supranational policy, as if such a policy always has positive effects for EU citizens. It seems that the European Commission likes to hear calls for more EU policy which one can understand in a political economy perspective— more supranational policy means more power for the European Commission. This, of course, does not mean that there are not good arguments to support reinforcing EU activities in certain fields. The relevant fields should be identified through the lens of fiscal federalism so that big infrastructure investment projects, defense and basic infrastructure redistribution should be part of EU activities, but here the EU member countries are rather hesitant to shift competences and funding authorization to the European Union. It would be natural that a considerable share of corporate tax revenue should go to the EU budget since EU firms benefit strongly from the EU integration. At the same time, the EU faces the political psychology that the country holding the biannually rotating presidency is expected to organize intra EU-cooperation and to not pursue its own interests in a strong manner; for example, when Germany will hold the EU presidency in the second half of 2020, there is a considerable likelihood that the EU-wide deposit insurance would be adopted—despite all legacy risk such as in part of Italy’s rather shaky banks where the share of non-performing loans seems to be rather high in some medium-sized banks which are often also regional banks. On the basis of the political psychology of the EU presidency, one can anticipate

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many non-optimal decisions are taken in the European Union. This weakens the EU in the global systemic competition. It has already been emphasized that the principle of subsidiarity (that is the priority of national decision-making over supranational EU decision-­making, if the supranational level does not let one to anticipate considerable welfare gains) is useful, but a stationary view is inadequate: one should ask how the assignment of tasks to the supranational versus the national policy layer would generate additional political interest on the part of voters in EU member countries so that voter turnout and the intensity of EU political competition would be reinforced which, in turn, should bring about more efficient political decision-making in the EU. Thus, a dynamic view of the principle of subsidiarity seems to be adequate. The German voting expert research group Forschungsgruppe Wahlen (Schroth 2014) has argued that the current modest task profile of the EU has the consequence that many German voters have a tendency at European elections to vote for small radical parties—that is, to indulge in some political experimentation in voting; it should also be noted that EU elections are considered as unimportant as local elections, and hence voter turnout is typically rather low and has declined over time (with one exception); hence, political competition is rather weak at the supranational level, and the efficiency of political decisions is rather modest. This would only change if the EU policy layer would have more important tasks and expenditure discretion than so far. The British political philosophy to keep the EU as small as possible is incompatible with this. There is a minimum size of the EU beyond which the European Union is unstable and would tend to disintegrate. With a pro-Brexit majority in the UK, it has become clear that other countries could also consider this option, and populist governments are rather likely to push for such an approach. The creation of the EU was as much about reinforcing peace in Europe as it was about the joint benefits of regional integration. With the UK heading toward March 2019, the British Secretary of State for Defence Gavin Williamson has publicly emphasized that the UK’s new aircraft carrier, the HMS Queen Elizabeth, will sail on its maiden voyage not just to the Mediterranean but indeed to the Pacific—as the UK is a “global power”. The speech of Gavin Williamson about the carrier HMS Queen Elizabeth of February 11,

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2019, was rather strange as it included the announcement of the building of new British military bases—one in Asia, the other in the Caribbean. These new bases are “to strengthen our global presence, enhance our lethality and increase our mass”. According to The Guardian, the Minister continued by saying that Brexit “has brought us to a great moment in our history”, when we must be ready to deploy “hard power” against those who “flout international law” (Sabbagh 2019). It seems that the UK has a problem in leaving the EU having benefited via its membership from over 40 EU free trade agreements and privileged market access to 71 countries. The May government had achieved commitments on a free trade agreement with only seven countries in February 2019, and Donald Trump had signaled that the US was willing to embark upon a US-UK free trade deal rather quickly. However, the new post-­ Brexit situation would look such that the UK—with one-fifth of the EU28’s economic weight—would have to negotiate a free trade agreement with dozens of countries. At the same time, the EU is weakened by Brexit as it loses about one-fifth of its EU28 annual real income, and a weaker EU seems to be to the advantage of Russia. The May government is pushing for new military might that could be used to offer protection to countries which, in turn, would then be more willing to offer generous trade concessions to the UK. The overall effect of Brexit will be that it has high costs for the people in UK, but the winners are Putin, the military-industrial complex in both the UK and the US (the UK will import more military equipment from the US) and the nineteenth century. The world could revert to a Great Powers system reminiscent of the late nineteenth century when big countries were competing at a global level for influence and power; in the twenty-first century, there will, however, be new players, namely, the US and China. The probability of such a new system of big powers is much reinforced if the US should really achieve a serious weakening of international organizations under President Trump (and subsequent populist presidents). The EU has three alternatives: • The European Union—where few understand that Brexit represents a set-back to the EU integration project—will gradually disintegrate as populist anti-EU forces are reinforced in many EU countries; at the

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same time, the UK will start to lure away some of the EU member countries, and a weakened EU will then gradually disintegrate. • The EU could embrace deeper political and economic integration— but not much guided by the focus on economic benefits of EU integration. Such a naïve EU deepening will bring about a too early common deposit insurance, for example, possibly in the second half of 2020 when Germany holds the rotating EU presidency and might not show enough resistance (due to its chairmanship position) to defend its national interest and actually sound principles of financial EU institution building which should not go along with a silent and opaque intra-EU redistribution of risks and costs. Such an integration club will not generate enough benefits for sustained EU integration, and the populist forces at the national and international level in the EU will witness a growth of influence so that, in the end, the EU will face disintegration from within: a first step could be switching from a customs union (the current EU status where the European Commission negotiates international trade and investment treaties for all EU member countries) to a free trade agreement. Then Germany, as the biggest EU country in economic terms, could try to obtain special gains from bilateralism, namely, getting better deals from non-EU partner countries than other EU countries (with the exception of France) could get. Once the supranational trade policy is dead, continued weakening of EU integration should be expected. • A prudent deepening of EU integration could be useful and sustained if such EU integration would be supported by a deliberate strategy to reinforce the benefits of the EU and EU membership for the people in the EU member countries. The EU could invest more—following the theory of fiscal federalism (Oates 1999)—in joint infrastructure policy and joint defense expenditures plus a minimum redistribution policy and a minimum joint tax policy, including minimum corporate income tax rates. The principle of subsidiarity which requires a political priority for EU member countries over supranational EU policy has often been invoked to minimize EU activities in the past (in some cases, with good reason). However, there is a critical minimum of EU tasks and activities needed to maintain relevance, and with only 1% of EU national income, the European Union is too small to really have a

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strong economic policy, not least because about 40% of EU expenditures are spent in the area of agriculture. A stronger EU would be an approach that is not in the interest of a populist UK and a populist US. One may argue that it would make sense to adopt more joint fiscal policy in the Eurozone in particular. Moreover, the EU could consider speaking with one voice at international organizations, that is, to share one seat which would then require greater intra-EU cooperation. This, however, will be quite difficult as long as political parties are not fully organized as pan-Eurozone parties or as pan-EU parties. If the EU should be too weak to export its own Social Market Economy approach to Asia and Africa, the US and China would clearly dominate the twenty-first century and the next free trade agreement with the US would certainly be much less in favor of the EU than the failed TTIP approach under the Obama Administration. Without a Social Market Economy in Europe, the world economy would have no model which demonstrates limited and sustained inequality, and this, in turn, has implications for the US—the lower half of the income pyramid would have to fear an almost continuous downward development of the income share. International cooperation could become weaker and more complex in a period of US populism and declining popular support for EU integration. As regards Germany, the biggest economy in the EU is politically divided through the rise of the AfD.  Chancellor Merkel’s policy in 2015—when the EU was facing the refugee wave—has decisively and directly supported the rise of the AfD. Her main pitfall was to almost suspend for several months the model of a parliamentary democracy; her decision to open Germany for a massive intake of refugees was taken without any prior parliamentary debate in late August or early September 2015. This was a serious blow to parliamentary democracy in Germany. Italy has a populist Conte government since summer 2018 which is threatening to leave the European Union. Spain is facing problems of political stability. Whether or not the Macron presidency will be successful in the sense that economic growth can be achieved and the populist parties on both the right and the left of the political spectrum can be pushed back remains to be seen. The populations of many Eastern

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European countries do not share the broadly post-material values that characterize broad strata in Western Europe. This implies a considerable risk of a political division of the EU which could easily be exploited by both Russia, China and the US.

A View on the OECD As regards institutional cooperation between the EU, the US and Japan, it seems that the OECD is a crucial international organization. However, underfunding by the US in 2018—which saw delayed US payments— and a slow adjustment in agenda setting makes the OECD an institution which is sometimes rather conservative in facing new economic challenges. The OECD’s work is based on agenda setting in a consensus-­ based way in dozens of committees which each stands for a special field of activities (e.g. monetary policy, fishing policy, education policy). As regards the OECD countries’ outreach program, the cooperation with China, India and some other non-OECD countries is quite useful, although it is not always really transparent. The EU and the US could at least try to organize a policy dialogue through the OECD with China and India as well as other countries. The OECD has certainly been very useful in coordinating macro policies over many decades, but it has also been rather hesitant in picking up the topic of new digital private property rights. Such digital property rights which could, for example, be organized on the basis of digital national or international cooperatives would bring more revenue sharing between digital suppliers and households/consumers so that consumers would appropriate part of the current profits of digital firms. This would bring less inequality, more interest in data security and a more stable global digital market system. Here, one may expect the EU and the US to embrace a new joint approach and bring countries from Asia, Africa and other regions into this new policy. Big data does not only have an economic value in OECD countries, but in all developing countries as well. As soon as private digital property rights are defined, data become part of the wealth of individual households and could be used as collateral for getting a loan from a bank. This would be quite important an innovation in many developing countries and could support economic catching up in the South.

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One might assume that all countries in the North have considerable interest in facilitating the catching up in the South. Whether or not the EU, the US, Japan and China could develop a joint approach in these new digital fields remains to be seen, but the European Union should obviously push for more digital cooperation and more digital property rights which, in turn, would stimulate investment in data security and thus contribute to more systemic stability in Europe and worldwide.

Improving the Digital Economy The way the digital economy has developed until the end of 2018 is one in which no clear private digital property rights for data have been defined. According to part of Western European legal traditions, it indeed seems to be difficult to implement such private data property rights. While almost everybody is using a mobile phone and the Internet in 2018 in OECD countries, there are no private data property rights. Most people have no idea how valuable their respective list of phone contacts or gallery of pictures is. One may suggest that individuals create private data firms, or data cooperatives which then organize the marketing of the private data of members. Government could also define a level zero for a national data platform in which all data of private persons living in a given country are stored; profits achieved by this platform, which might take the form of a foundation, could be redistributed to all citizens—with part of profit taxed. Such initiatives would help to nurture a new perception about data, namely, that data has value. Hence, losing data through cyberattacks would be an economic loss, and hence the willingness to invest in data protection would become much bigger. It is clear that digital markets are often characterized by weak competition, particularly if the first-mover advantages of an innovative company and network effects overlap as is the case with search engines—and Google being a prime example. Competition policy in the digital economy would naturally often be a cross-border challenge so that international cooperation in competition policy would be required. However, the EU and the US, plus Japan, South Korea and China, have not developed much cooperation in digital competition policy. The Trump Administration might be quite reluctant to consider new digital competition policy within an international framework.

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Transatlantic cooperation in the age of Trumpism will become rather difficult. The US will emphasize higher military expenditures, and the Trump Administration will push in particular for more military exports, not least as a means of improving the US current account—a very strange and risky strategy to solve a problem which normally should have been solved by raising the US savings ratio. The EU-Russian relations seem not to be really stable, and a lack of EU-Russia cooperation could be a serious problem. With the US under the Trump Administration emphasizing bilateralism and a new nationalist policy, the European Union and its member countries are facing difficult challenges; with the UK leaving the EU after 46 years, Western European security cooperation looks more complex. It seems clear that France will have a stronger position in the EU27 than before, not least because it is a nuclear military power. At the bottom line, a rollback of US populism must come from political forces within the US, possibly also from the US scientific community. It is rather unusual that a US president would have little regard for US scientists, academics and experts. However, President Trump has been very reluctant to listen to such voices in relation to either climate policy or economic policy. One may, however, point out that scientists should have a stronger voice in digital social networks. Here, it also seems obvious that stronger transatlantic cooperation among scientists—in many fields including also scientists from Asia—could be useful. A rollback of populism is a very long-term challenge, and it will concern both the US and the European Union.

Crucial New Prospects for Cooperation in Climate Policy The Western world is facing opportunities and problems with regard to more cooperation with Asia and Africa as people across the globe face the common problem of global warming. It is a fact that the richest and largest Western economy, the USA, has left the climate-related Paris Agreement of 2015. President Trump seems to ignore that there is a serious climate issue, although empirical evidence from many studies worldwide—including those from many leading US researchers—shows that there is a serious problem of global warming. The climate problem is a truly global public good problem as the challenge of CO2 emissions from whatever geographical source in the world contributes to global warming; overcoming the

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free rider problem is thus a challenge. Traditionally, the leading Western country would not assume a position that the administration would object to the sacrifice of a small loss in national income if this would help to achieve global CO2 mitigation in a joint international, UN or G20 effort. As regards California and some other US states, there are at least regional political forces willing to establish emission trading systems (California has set up a system with the Canadian provinces of Ontario and Quebec). Under normal non-populist circumstances, the US president’s climate policy would be a natural part of his international leadership role and new climate-friendly products and technologies from the USA would underpin this leadership. President Trump, however, does not take scientific analysis seriously, he rather believes in political power, the influence of networks of wealthy conservative partners and his personal ability to shape the US public mood via his Twitter communication; his willingness to listen to academics about the virtues of free trade, a rules-based global economy and multilateralism is very modest. It is unclear that when and where the US counter-perspective to Trumpism will be developed. One may not rule out, in eastern states of the USA, certain governors will take on this role or it could be the state of California with its strong record of innovation. While few Secretaries of State came from California to serve in US administrations in the past, a wave of new ideas and entrepreneurship from the state has contributed to US leadership and global US influence. It is also remarkable that California has developed an Emission Trading System (ETS) that is more comprehensive than the European Union’s climate-oriented forerunner system EU ETS which was started in 2005 and which covers the energy sector and industry—45% of the EU’s greenhouse gas emissions (CO2 equivalents). California’s ETS covers 85% of all CO2 emissions and thus is broader than the system in the EU. Clearly, there is a medium-term opportunity that the EU, California (plus Ontario and Quebec), China, the Republic of Korea, Japan (with the Tokyo and Saitama prefectures), plus other countries with a new ETS would integrate to form a new international ETS which would help to achieve in an efficient way a new, climate-friendly global system that brings prosperity, climate protection and stability. Part of the CO2 mitigation would, of course, also come from countries with climate-friendly

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innovation policies and part from the efficiency gains through free trade—assuming that the WTO will still be operating. It would be useful to achieve a global integration of ETS or at least among the G20 group. One cannot expect a smooth ETS integration, which would bring benefits for all countries involved, if the USA would become an outsider in the G20 group. It seems obvious that a long period of US populism would destroy the global opportunity for sustainability, prosperity and stability. Instead, one would face a politically driven economic boom and bust cycle in the USA—with rather artificial boom periods. Sustainability in an ecological and political sense is at a premium in the early twenty-first century in the USA. Political enlightenment is desirable.

Post-Trump Perspectives President Trump has created the problem of declining credibility for both the presidency and the US. His lack of seriousness and honesty in many political projects and in a large part of his public statements via Twitter has created a new poor standard for US presidential communication. Lower credibility means that stronger policy intervention is needed to achieve the same effect as before. Thus, restoring the credibility of the office of president will be a long-term challenge in the US. One may argue that Trump has some unconventional policy elements which have supported his temporary political success—and that the Republican Party is part of the rationality problem in the American political system. Trump’s crude logic of simply looking for a plausible approach to get political support for reelection is strange in some cases, for example, considering automotive imports from the EU as a threat to national security and designing import tariffs in a way that some of his “winner states” would benefit, for example, in the steel or aluminum sector or in the automotive sector; it is disappointing that the US Council of Economic Advisers has been rather silent in the debates about US trade policy and has also not looked deeply into income distribution issues. For many years, the Democratic Party, in turn, also exhibited no broad understanding of the challenges of economic inequality. The next presidential elections could be characterized by the reelection of Trump or the election of a Democratic president. However, as long as the problem of reducing income distribution is not on the political

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agenda of voters, the political system cannot deliver policy concepts to cope with the challenge of rising income inequality. It could be useful for EU countries to support transatlantic research on a modern Social Market Economy and to embark upon policy partnership projects, such as transatlantic city twinning projects. The EU could also include countries from the European Economic Area. As regards the trilateral US-EU-China perspective, it is important that neither the US nor the EU pushes China into a political position that it appears effectively to not be part of the world economy. China is already big enough to have sustained growth even with much reduced trade with the US and the EU. This, however, is not in the interest of either the US or Europe. Trade can be an engine not just of more prosperity but also of political and cultural dialogue. It is quite important that the EU is not disintegrating because otherwise a populist US is likely to determine alone the Western policy vis-à-vis China. A populist US would be protectionist and nationalist so that the twenty-first century would be shaped by long-term conflicts between the two countries. Japan would be more or less forced to follow the US, and for the UK (post-Brexit), a similar logic would apply. There is no doubt that digital global expansion is likely to reinforce inequality with respect to market income, but governments could correct this inequality to some extent. It is also obvious that a liberal rule-based economic order is an important foundation of global prosperity. Thus, it is quite important that a critical minimum group of Western and Asian countries support multilateralism. Trump’s aggressive tricks to push aside the World Trade Organization should be not possible in the future, but this is mainly an internal question for the US political system, including the extent to which Congress would, in the future, allow that the president of the day has the broad autonomy to start trade wars under the Section 232 of the Trade Expansion Act.

References Allard, C. Koeva Brooks, P., Bluedorn, J. C., Bornhorst, F., Ohnsorge, F. L., & Christopherson Puh, K. M.. (2013). Toward a Fiscal Union for the Euro Area. IMF Staff Discussion Note SDN 13/09. Washington, DC: IMF. Antras, P., De Gortari, A., & Itskhoki, O. (2017). Globalization, Inequality and Welfare. Journal of International Economics, 108, 387–412.

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Brandolini, A., & Smeeding, T. (2007). Inequality Patterns in Western-Type Democracies: Cross-Country Differences and Time Changes. Centre for Household, Income, Labour and Demographic Economics, No. 8. Turin, Italy. Canberra Group. (2001). Expert Group on Household Income Statistics: Final Report and Recommendations. Ottawa: Canberra Group. Dauth, W., Findeisen, S., & Suedekum, J. (2017). Trade and Manufacturing Jobs in Germany. American Economic Review, 107(5), 337–342. Foster, J. E., & Wolfson, M. (2010). Polarization and the Decline of the Middle Class: Canada and the U.S. Journal of Economic Inequality, 8, 247–273. IMF. (2018). United States of America: Staff Concluding Statement of the 2018 Article IV Mission, dated June 14, 2018, Country Report 18/207. IMF: Washington, DC. Oates, W.  E. (1999). An Essay on Fiscal Federalism. Journal of Economic Literature, 37, 1120–1149. OECD. (2017, May). Basic Income as a Policy Option: Can it Add Up? In Policy Brief on the Future of Work. Paris: OECD Publishing. Rawls, J. (1971). A Theory of Justice. Cambridge, MA: Harvard University Press/Belknap. Sabbagh, D. (2019). Brexit ‘Can Enhance UK’s Lethality’, Says Defence Secretary. The Guardian, February 11. Retrieved from https://www.theguardian.com/politics/2019/feb/11/brexit-uk-military-defence-gavin-williamson. Schroth, Y. (2014). Europawahl 2014, Presentation at the state chancellery of North-Rhine Westphalia, Düsselforf, 27 May 2014. US Commercial Service. (2015). Singapore: Healthcare Overview. Washington, DC: United States of America Department of Commerce. Welfens, P.  J. J. (2018a). Perspektiven einer künftigen EU-Sozialpolitik: Schwerpunkte, Instrumente, Zuständigkeiten, Konfliktlinien [Perspectives on a future EU Social Policy: Key Areasm Instruments, Competences and Conflict Areas]. Presentation at the Workshop Financial and Social Policy—A Conflict Area in the European Single Market Hosted by the German Federal Ministry of Finance, Berlin, 23 April 2018. Welfens, P.  J. J. (2018b). Import Tariffs, Foreign Direct Investment and Innovation: A New View on Growth and Protectionism. EIIW Discussion Paper No. 252, www.eiiw.eu. Wolff, E. N., Zacharias, A., Masterson, T., Eren, S., Sharpe, A., & Hazell, H. (2012, January). A Comparison of Inequality and Living Standards in Canada and the United States Using an Expanded Measure of Economic Well-Being. Working Paper No. 703, Levi Economics Institute of Bard College. Wolfson, M., & Murphy, B. (1998). New Views on Inequality Trends in Canada and the United States. Monthly Labor Review, 121(4), 3–23.

Appendix

 ppendix A: National Income Shares A in Selected World Regions and Countries, 2016 Figure A1.1 shows that income inequality in the Middle East, India, Brazil and Sub-Saharan Africa is quite pronounced in the sense that the top 10% of households earn more than 50% of market income. In Europe, the share was a rather modest 37% in 2016, and the value for the US-Canada was 10 points higher.

© The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6

307

308 Appendix

Share of National Income (%)

Top 10% National Income Shares Across the World, 2016* 70 60 50 40 30 20 10 0

Fig. A1.1  Top 10% national income shares in selected world regions and countries, 2016. Note: National income refers to pre-tax national income. Data for Brazil, India, Russian Federation and China refer to 2015. Data for world regions refer to 2016. Source: Alvaredo et al. (2018), World Inequality Report 2018, p. 9 www.wir2018.wid.world

Appendix B: Full Price Discrimination∗ A

p p1

F

p0

E0

B Z 0

q0

q

1 Ap0 , initial prof2 its p0E0B increase by area p1FE0 p0 which is equivalent to consumer surplus. Source: Own representation

Fig. B1.1  Full price discrimination (based on ICT). Note: ∗ Ap1 =

 Appendix 

309

Welfare Loss from Taxation (and Import Tariffs) Consider an import volume tariff rate t ′ . A simple partial equilibrium analysis will show now the tariff-ridden price p′ and the net of tariff price p1 , the difference being t ′ ; the marginal product curve k ′ is assumed to be given by k ′ = c > 0 . The consumer surplus is AEp0 , the producer surplus is BEp0 . It is assumed that the demand curve is q = a − b ( p + t ′ ) , where a and b are positive parameters. The tax-/tariff-­induced welfare loss is the triangle EFG which can be calculated as 0.5 t ′ ( q0 − q1 ) = bct ′2 / ( 2 ( b + c ) ) since the equilibrium net price is p = ( a − bt ′ ) / ( b + c ) and the equilibrium quantity is q1 = c ( a − bt ′ ) / ( b + c ) . The welfare loss is quadratic in the tax rate/import tariff rate. The welfare loss depends on the parameters b and c only. The higher c and b are, the higher the welfare loss is; high marginal costs and a low elasticity price sensitiveness of demand imply rather high welfare losses. The welfare loss would increase if the marginal cost parameter were a positive function of t ′ and ln t ′ , respectively; this is rather likely since firms’ allocation of time to avoid being taxed at tax rate t ′ will positively p

File: Import Tariff Big Country SS0

DD0

(1+t‘)p*‘ p* P*‘

H

G

A

q0

F

B

E

C

D

q2

q3 q1

q

Fig. B1.2  Taxation/Import tariff (The case of a big country). Note: The free trade price is p ∗, the import tariff is t ′, the tariff-ridden import price is (1 + t ′ ) p ∗′, the net import price is p ∗′ . The free trade import quantity is q1 minus q0 , with an import tariff it falls to q3 minus q2 . Source: Own representation

310 Appendix

depend on t ′ . However, if government spends revenues t ′q1 in part on the promotion of process innovations in this sector, the welfare loss would be a bit smaller than indicated by the traditional (quadratic) formula above. If one assumes that there is a good imported by a large economy, the optimum tariff literature says that the optimum tariff is 1 / ε , where ε is the output elasticity, and all goods, by assumption, are produced abroad. The optimum import tariff for a small economy is zero since the small country cannot affect world market prices by importing a lower quantity after imposing a tariff. There will always be a loss of consumer welfare that exceeds the tariff revenue. In the case of a big economy, there will be a reduction of the world market price so that part of the tariff revenue stands for a welfare gain that could be larger than the deadweight loss, and this leads to the question of an optimal import tariff. Now, let us assume that a share of the sectoral capital stock of the respective sector is φ. Then the optimum import tariff is no longer 1 / ε , but is smaller: the new term is (1 / ε ) (1 − ϕ ′ϕ ) , where ϕ ′ is a positive parameter in the range 0,1 (Welfens 2018b). This reflects the fact that pushing down the world market price through an import tariff will reduce profits abroad—part of which are the profits of subsidiaries/firms abroad owned by investors from country 1.

 ppendix C: IMF World Economic Outlook, A October 2018 The IMF’s World Economic Outlook from October 2018 is not so optimistic for the US growth in the medium term—with some key insights explained in the subsequent Box (IMF 2018b, p. 19).

 Appendix 

311

Box C.1. Growth Outlook: Advanced Economies Advanced economies are projected to expand by 2.4% in 2018 (a marginally faster pace than in 2017) and 2.1% in 2019. Growth in advanced economies is expected to decline to 1.7% in 2020 as the US tax cuts are partially reversed, and to 1.5% in the medium term as working-age population growth continues to slow. • Growth in the United States is expected to peak at 2.9% in 2018, supported by the procyclical fiscal stimulus after eight consecutive years of expansion and still-loose financial conditions (despite expected monetary tightening). Growth is expected to soften to 2.5% in 2019 (a downward revision of 0.2 percentage point relative to the April 2018 World Economic Outlook [WEO] due to the recently introduced trade measures) and to drop to 1.8% in 2020 as the fiscal stimulus begins to unwind. Strong domestic demand is projected to push the economy above full employment and increase imports and the current account deficit. Medium-term growth is forecast to temporarily decline below potential at 1.4% as the positive output gap is gradually closed. • Growth is projected to remain strong in the euro area, but has been revised down by 0.4 percentage point to 2.0% for 2018, reflecting weaker-than-­expected performance in the first half of the year. Growth is forecast to gradually slow further to 1.9% in 2019, 0.1 percentage point lower than the April forecast. Healthy consumer spending and job creation amid supportive monetary policy are expected to continue to provide strong aggregate demand, though at a moderating pace. Shortterm profiles of country-specific growth rates vary. In France, growth is expected to moderate to 1.6% in 2018 and 2019, 0.5 (0.4) percentage point weaker than in the April 2018 WEO for 2018 (2019), reflecting softer external demand as well as lower outturns and high-­frequency indicators in 2018. In Germany, growth was revised down to 1.9% in 2018 and 2019 (by 0.6 percentage point and 0.1 percentage point, respectively) because of a slowdown in exports and industrial production. Italy’s growth forecast is also lower than in the April 2018 WEO, estimated at 1.2% for 2018 and 1% in 2019, because of the underlying deterioration in external and domestic demand and uncertainty about the new government’s policy agenda. In Spain, growth is expected to be 2.7% in 2018 and 2.2% in 2019, which is a 0.1 percentage point decline relative to the April forecast for 2018, and no change for 2019. Mediumterm growth in the euro area, projected at about 1.4%, is expected to be constrained by slow productivity growth and unfavorable demographics.

312 Appendix

• In the United Kingdom, growth is projected to slow to 1.4% in 2018 and 1.5% in 2019 (from 1.7% in 2017). This forecast represents a downward revision of 0.2 percentage point for 2018 relative to the April 2018 WEO, driven by weak growth in the first quarter of the year, partly due to weather-related factors. The medium-term growth forecast remains at 1.6%, weighed down by the anticipated higher barriers to trade following Brexit. (Assumptions regarding the Brexit outcome remain broadly unchanged relative to the April 2018 and October 2017 WEOs. Tariffs on trade with the European Union are expected to remain at zero, and nontariff costs will likely increase moderately.) • Japan’s growth is projected to moderate to 1.1% in 2018 (from a strong, above-trend outturn of 1.7% in 2017), before softening to 0.9% in 2019. The downward revision of 0.1 percentage point for 2018 relative to the April 2018 WEO is largely due to the contraction observed in the first quarter of 2018, and given the uptick in growth and domestic demand in the second quarter of 2018, this is likely to represent a temporary dip rather than the beginning of a turn in the cycle. Japan’s medium-term prospects are impeded by unfavorable demographics and a trend decline in the labor force. • Among other advanced economies, growth is projected to moderate in Canada to 2.1% in 2018 and 2.0% in 2019, and to exceed 3% in Australia in 2018, before declining to 2.8% in 2019. In Korea, growth is projected at 2.8% in 2018 and 2.6% in 2019. The downward revisions to the 2019 growth forecast for Australia and Korea relative to the April 2018 WEO partially reflect the negative effect of the recently introduced trade measures.

 ppendix D: The Sorcerer’s Apprentice A (Original from Johann Wolfgang von Goethe, English Version: Translation by PJJ Welfens) President Donald Trump, quite unexperienced as a politician, has assumed full US executive political power in 2017—after his election in 2016. He does not really know how best to use the partly magic power of the White House. Goethe’s poems “The Sorcerer’s Apprentice” summarizes the problem:

 Appendix 

The old witchman Left the house for now! And his magic skills then Should work for me somehow. His words and deeds I have memorized, the tricks And as my spirit leads Wonders happen by the clicks. Highup! Highup Considerable fields plus the hill Would follow my will Full of waterflows In bowls and every cup Look at my liquid shows. Come here, my old broom! Take old rags from the niche You are my servant groom Now you follow my wish. Walk on two legs so free On your top a head then. Hurry up for me With water in a can. … Stand still, stand still As we enjoyed right from trough All the water—it’s enough From your torrent’s go. But just I note like a huge bill: Forgotten is the magic word, oh no. … Oh you devil from hell You want the house to go under As I see for every bell So much water as evil wonder. A horror broom so evil Does not want to listen still …

313

314 Appendix

Too fluid running, many rivers In this room, on all stairs wet choice What a horror, currents—shivers. My master, hear my voice. Oh, there comes the master, Sir, the problem is incredibly big. The spirits which I called—disaster. They should go, but all will stick. “Fly back to the niche Broom, broom! All over, like doom. You as witchcraft good or ill Call to life from fiche Only the old Master’s will.”

 ppendix E: Tariffs and Counter-Tariffs—An A Overview of the Trade Conflict in 2018 Table E1.1  An overview of both the enacted and threatened tariffs of the US, EU and other countries

Date

Measure

22.01.18

The US places import tariffs on imported solar panels (15–30%) and on washing machines (20–50%) from all countries US announces its intention to place tariffs on imported steel (25%) and aluminum (10%) from all countries EU announces countermeasures: 25% tariff on imports from the US; the first step in a three-part strategy, which could also include filing a complaint at the WTO and the introduction of protective measures vis-à-vis third countries

01.03.18

07.03.18

Value of goods on which tariffs are levied (in billions of USD, 2017) 8.5 and 1.8, respectively 48.9

3.4

(continued)

 Appendix 

315

Table E1.1 (continued)

Date 23.03.18

Measure

The US enacts tariffs on imports of steel and aluminum from all countries (with the provisional exceptions of Mexico, Canada, EU, South Korea, Argentina, Brazil, Australia): 28.03.18 China enacts 15–25% tariffs on the import of 128 products (including aluminum scrap, pork, fruit, nuts) from the US 03.04.18 US announces further tariffs on imports from China citing unfair trade practices and the theft of intellectual property 17.04.18 China raises tariffs on imports of sorghum (176.8%) from the US; this was later removed on May 18, 2018 25.05.18 US announces tariffs on imports of automobiles and auto parts (up to 25%) from the EU, Mexico, Canada and China. 01.06.18 US imposes tariffs on imports of steel and aluminum also against the EU, Canada and Mexico 01.06.18 The EU files a complaint at the WTO against the US tariffs on steel and aluminum 01.06.2018 Argentina agrees to a quota on exports of steel and aluminum to the US; Brazil agrees to a quote on exports of steel to the US; the US introduces tariffs on imports of aluminum from Brazil 22.06.18 EU introduces counter-tariffs on imports of steel, aluminum, various agricultural products, foodstuffs and consumer goods from the US 01.07.18 Canada introduces counter-tariffs on imports of steel, aluminum, assorted foodstuffs and consumer goods from the US 06.07.18 US imposes tariffs, including on automobiles, aircraft parts and hard drives (25%) from China, Level 1 of $50bn measures 06.07.18 China imposes tariffs on imports, amongst others, on automobiles and soya beans (25%) from the US, Level 1

Value of goods on which tariffs are levied (in billions of USD, 2017) China: 2.8 of 48

2.4

46.0

350 (208 excl. auto parts) EU: 7 of 48

3.4

12.8

34

34

(continued)

316 Appendix Table E1.1 (continued)

Date

Measure

10.07.18

US announces tariffs on imports of IT consumer goods and textiles (10–25%) from China US President Trump threatens to impose tariffs on all imports from China US temporarily withdraws its threat to enact tariffs on automobile imports from the EU China announces planned counter-tariffs (5–25%) on further products from the US (including food stuffs, liquid gas), in the event that announced US tariffs on Chinese imports of $200bn are implemented US doubles tariffs on imports of steel and aluminum from Turkey (50% and 20%, respectively) Turkey imposes counter-tariffs on imports of 22 product groups (including automobiles, alcohol, tobacco, food stuffs) from the US US imposes tariffs on imports of, amongst others, automobiles, aircraft parts and hard drives (25%) from China, Level 2 China imposes tariffs on, amongst other items, on automobiles and soya beans (25%) from the US, Level 2 The EU suggests an agreement with the US to mutually abolish tariffs by each party on automobile imports 2018, the US imposes new tariffs on further products from China (10%, from 2019: 25%), across a large range of products (including consumer goods, IT sector, textiles, automobiles, bicycles); with effect from September 24, 2018 China announces counter-tariffs (5–10%) of further American imports; with effect from 24.09.18

20.07.18 25.07.18 03.08.18

13.08.18

15.08.18

23.08.18

23.08.18

30.08.18

18.09.18

18.09.18

Value of goods on which tariffs are levied (in billions of USD, 2017) 200

505

60

16

16

200

60

Source: ifo Schnelldienst 19/2018, October 11, 2018, Table 5.1, p. 62 [Translated from German]

 Appendix 

317

 ppendix F: Recent Research on Inequality A Dynamics and Skills A summary of the key findings of the study of Jovicic (2018), which is an international comparative analysis looking at issues of inequality, employment and skills in OECD countries. The analysis by Jovicic looks into key issues which are relevant from the perspective of this book; the author poses the research question of the role, if any, inequality has in promoting employment by looking at international data. The analysis begins with a chapter which opens with the classical trade-off discussion in economics and then switches to an approach that looks into institutional settings and diversity; the author seeks to link the inequality analysis with aspects of the institutional framework in the respective countries. In an econometric analysis, Jovicic looks into the results of a panel data analysis for 21 OECD countries, namely, whether or not inequality could help to generate higher employment. At the bottom line, the result is that while institutional arrangements do affect unemployment, they have no impact on employment. One may, however, note that prior contributions to the literature have shown for some countries that union membership negatively affects foreign direct investment inflows and employment, respectively. Jovicic also looks into internationally comparative skills (literacy skills, numeracy skills). The main idea is to find out whether or not wage compression from below (i.e. wages exceed the labor productivity of weakly skilled workers) is impairing the job prospects for those weakly skilled workers. Here, the author focuses on Germany and Japan—with rather high wage dispersion—and also looks at the US. It is noteworthy that in the US, with its high ratio of immigrant workers, 25% of all workers are in the lowest skill level bracket; in Japan, the relevant figure is only 7%. The author develops a wage regression along the traditional lines of the Mincer approach and finds a rather standard result for schooling in the case of the US. Wage dispersion across Score Groups is discussed. The key result with the PIAAC database is in line with Freeman’s findings based on the older IALS data set. Even in narrowly defined Score Groups, the US has a very high wage dispersion. One should, however, not overlook that part of the rather large wage dispersion in the US could

318 Appendix

actually reflect cross-state variation in regional price levels: as the regional price variation across states in the US is fairly high, this will naturally be reflected in part of the wage dispersion—theoretically, it should be fully reflected in jobs in the non-tradables sector. The author puts the analytical focus on the link between average literacy scores and its variance; additionally, the focus is on the link between the variance of the scores and intergenerational skill mobility (and there is also an analysis of international differences in scores). The analysis effectively puts the focus on the domestic (native) population. The skill distribution is considered on the basis of the 59th minus the 5th quantile divided by the median, followed by D90/D50 and D50/D10 (ratio of deciles). It is rather obvious in the analysis of Jovicic that national distributions across countries differ mainly in the lower skill brackets. The author examines national skill distributions and intergeneration skill mobility—a stronger national variance is expected to go along with higher intergenerational education mobility. It is argued that the education level of the father-generation more strongly affects education mobility in the lower 5% quantile than in the top brackets.

 ppendix G: OECD Health Indicators: Infant A Mortality and Life Expectancy Table G1.1  Infant mortality rates and life expectancy at birth, OECD and selected countries Country

Infant mortalitya

Country

Life expectancy

Iceland Finland Japan Slovenia Norway Estonia Sweden Spain Czechia Italy Korea Ireland

0.7 1.9 2 2 2.2 2.3 2.5 2.7 2.8 2.8 2.8 3

Japan Switzerland Spain Italy Luxembourg Australia Norway Israel France Korea Sweden Iceland

84.1 83.7 83.4 83.3 82.8 82.5 82.5 82.5 82.4 82.4 82.4 82.3 (continued)

 Appendix 

319

Table G1.1 (continued) Country

Infant mortalitya

Country

Life expectancy

Australia Austria Denmark Israel Belgium Portugal Germany Netherlands Switzerland France Latvia Luxembourg UK Hungary Poland Greece Lithuania Canada Slovakia New Zealand US Russian Fed. Chile Costa Rica China Turkey Mexico Brazil Colombia Indonesia South Africa India

3.1 3.1 3.1 3.1 3.2 3.2 3.4 3.5 3.6 3.7 3.7 3.8 3.8 3.9 4 4.2 4.5 4.7 5.4 5.7 5.9 6 6.9 8.5 9.2 10 12.1 14.6 17.1 22.8 33.6 37.9

Canada Ireland Austria New Zealand The Netherlands Belgium Finland Greece Slovenia Portugal UK Germany Denmark Chile Costa Rica Czechia US Poland Turkey Estonia Slovakia Hungary Colombia China Mexico Brazil Lithuania Latvia Russia Fed. Indonesia India South Africa

81.9 81.8 81.7 81.7 81.6 81.5 81.5 81.5 81.3 81.2 81.2 81.1 80.9 79.9 79.6 79.1 78.6 78 78 77.8 77.3 76.2 76.2 76 75.4 74.8 74.8 74.7 71.8 69.1 68.4 57.5

Source: OECD Data, Health Indicators, accessed November 11, 2018 a Infant mortality related to deaths per 1000 live births, figures for 2016 or latest available (2014 or later). Countries by order of lowest infant mortality to highest. Life expectancy relates to total life expectancy (male and female), figures for 2017 or latest available (2015 or later). Countries ranked by order of highest life expectancy to lowest

320 Appendix

 ppendix H: US Civilian Population/Total A Number of Households, 1984–2017 Civilian Non-Institutional Population/Total Households 2.60 2.50 2.40 2.30 2.20 2.10 2.00 1.90

Fig. H1.1  US civilian population/total households. Note: This graph shows the declining number of persons per US household. Thus, in the United States, the number of households has increased faster than the total population, which means that any measure divided by population grows faster than one divided by number of households (including income figures). Source: Own representation based on data available from the Federal Reserve Economic Data, Federal Reserve Bank of St. Louis

 ppendix I: Transfers and Openness—Traditional A and Value-Added (2007, 2009, 2011) a

2007 20 18

FR IT

16

DKBE GR PO FI PT SW

14

Transfers, %GDP

AT DE

12

US UKSP NO JN NZNL CH

10 8

AU

y = 0.007x + 11.34 LUX

CZ SK IE EST

KO

2 0

HU

LV

6 4

SI

MEX 0

50

100

150

200

250

300

350

Openness (Gross Exp+Gross Imp/GDP, %)

b

2007 20 FR AT IT DE DKBE GR PO PT FI SW

18 16

Transfers, %GDP

14

US UKSP NO JN NZNL CH

12 10

AU

8

SI

HU y = 0.0103x + 11.217 LUX

CZ SK IE EST

LV

6 KO

4 MEX

2 0 0

50

100

150

200

Openness (Value-Added Exp+Value-Added Imp)/GDP, %

250

322 Appendix

c

2009 FR AT IT GR DEFI PT DK BESI

20

Transfers, %GDP

18 16

US

14

JN

HU SW SP UK PO EST SK NO LV CZ NZ

12 10

y = 0.0094x + 13.257

LUX

IE

NL CH

AU

8 6

KO

4

MEX

2 0 0

50

100

150

200

300

250

Openness (Gross Exp+Gross Imp/GDP, %)

d

2009 FR AT IT GR DEFI PT DK BE

20

Transfers, %GDP

18 16

US

14

JN

SP UK

NZ NL

12

SI

HU

SW PO SK EST NO LV CZ

y = 0.0156x + 12.986

LUX

IE

CH

10 AU

8 6

KO

4

MEX

2 0 0

50

100

150

Openness (Value-Added Exp+Value-Added Imp)/GDP, %

200

 Appendix 

e

2011 20

GR FR IT

18

US

14

SI

BE SPDE UK PO NOSW

16

Transfers, %GDP

AT DK FI PT

JN

12

y = 0.0023x + 13.597 LUX

HU CZ

IE

SK

LV EST NZ NL CH

10 8

AU

6 KO

4 MEX

2 0 0

50

100

150

200

250

300

350

Openness (Gross Exp+Gross Imp/GDP, %)

f

2011 20

GR FR IT

18 16 JN

HU CZ

12 NZ NL

10 8

SI

BE

SP DE UK PO SW NO

US

14

Transfers, %GDP

AT DK FI PT

SK

y = 0.0028x + 13.603

LUX

IE

LV EST CH

AU

6 KO

4 MEX

2 0 0

50

100

150

200

Openness (Value-Added Exp+Value-Added Imp)/GDP, %

250

323

324 Appendix

g

2007 20 18

FR IT

16

GR

Transfers, %GDP

14 12

US JN

10

AT DE DK BE HU POFI SI SW

PT

NZ NL

IE

CH

EST AU LV

6 4

KO

2 0

LUX

SK CZ NO

UK SP

8

y = 0.0398x + 10.826

MEX 0

10

20

30

40

50

60

70

80

Value-Added Exports, %GDP

h

2009 25

20 GR

FR IT

AT

FI DE DK BESI HU PO SW SK SPUK NOEST LV CZ

Transfers, %GDP

PT

15

US JN

NZ

10

NL

y = 0.0285x + 13.216

LUX

IE

CH

AU 5

KO MEX

0

0

10

20

30

40

Value-Added Exports, %GDP

50

60

70

 Appendix 

i

325

2011 25

20

GR FR IT

AT

Transfers, %GDP

PT FI DK 15

SP UK

US JN

NZ

10

SI

BE DE

HU

y = -0.0083x + 14.044

NL

LUX

IE

SK POSW NO CZ EST

LV CH

AU 5

KO MEX

0 0

10

20

30

40

50

60

70

Value-Added Exports, %GDP

Fig. I1.1  (a–i) Transfers and openness for selected countries (exports and imports; traditional and value-added), 2007, 2009 and 2011. Source: EIIW calculations using data on transfers (OECD; Social Benefits Cash), gross domestic product (World Bank, World Development Indicators), and gross exports, gross imports, value-added exports, value-added imports—OECD TiVA Database

 ppendix J: US Protectionism and the US-Sino A Trade Conflict: Optimum Import Tariff of a Big Country with Inward-FDI A big country can improve its welfare through an import tariff as long as there is no retaliation tariff. This is the traditional textbook view, but it is not really an adequate view in the presence of outward foreign direct investment (e.g. of the US). An import tariff drives a wedge between the

326 Appendix

gross price (tariff-ridden price p1′ ) paid by the consumers in the importing country and the net price ( p1 ) obtained by the foreign suppliers (here, Chinese firms). If one considers a case where there is only foreign production—see the supply curve k ′ ∗ (foreign marginal cost curve)— and domestic demand is represented by the demand curve DD, the free trade price is p0 and the consumer welfare is equal to the triangle AEp0 . The profits of the foreign suppliers are equal to the triangle BEp0 . If an import tariff equal to E ′F is adopted, the imported quantity falls from q0 to q1 . The loss of consumer welfare is E ′EG , and the foreign suppliers lose the profit triangle GEF. Tariff revenue is p1′ E ′Fp1 , but the area p1′ E ′Gp0 is not a welfare loss for the home country since it is assumed that government will use tariff revenues to provide additional government services or income taxes are reduced. Thus, there is a welfare gain for the home country of rectangle p0 GFp1 (i.e. part of the tariff revenue) minus the triangle E ′EG . This view, however, is not correct if there is outward foreign direct investment so that part of foreign profits indeed stand for income of the home country’s population. In the following graph, it has been assumed that the shaded area represents the profits of foreign subsidiaries abroad, but the remainder of the profits is accruing to foreign firms; part of the profit triangle loss (part of the traditional welfare loss from import tariffs; FGH) is now also a welfare loss relevant for the home country. The US has big outward foreign direct investment in China; hence, the profits of US firms could reduce, and a unilateral import tariff is unlikely to generate a US welfare gain. This extended analysis indeed shows some new aspects of tariff analysis (one might also want to add the role of imported intermediate products).

 Appendix 

327

Optimum Import Tariff with Outward Foreign Direct Investment (Profits from Abroad are P1GF) p

A

K‘*0 E‘

p1‘ p0

++++ ++

p1

G - -H

E

F

DD0

B

p1

q1

0

q0

Z

q

Fig. J1.1  Optimum Tariff with outward foreign direct investment (profits from abroad are P1GF). Source: Own representation

 ppendix K: China’s Overseas Direct Investment A Flow and Stock, 2007/8–2016, US $ 120 100 80

Billion

Billion

China's Net Foreign Direct Investment Flow, US$

28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 -2

60 40 20 2007

2008

2009

Indonesia Republic of Korea Algeria Nigeria Germany Cayman Islands Canada New Zealand

2010

2011

2012

Japan Thailand Sudan South Africa France Mexico United States Hong Kong, China (rhs)

2013

2014

Macao, China Vietnam Guinea Europe Russia Virgin Is. (E) Oceania

2015

2016

0

Singapore Africa Madagascar United Kingdom Latin America North America Australia

Fig. K1.1  China’s net overseas direct investment flow, US dollar. Source: National Bureau of Statistics of China

328 Appendix China's Outward Foreign Direct Investment Stock, US$ 250

800 700 600 500

150

Billions

Billions

200

400 100

300 200

50 0

100 2008

2009

Indonesia Republic of Korea Algeria Nigeria Germany Cayman Islands Canada New Zealand

2010

2011

2012

Japan Thailand Sudan South Africa France Mexico United States Hong Kong, China (rhs)

2013

2014

Macao, China Vietnam Guinea Europe Russia Virgin Is. Oceania

2015

2016

0

Singapore Africa Madagascar United Kingdom Latin America North America Australia

Fig. K1.2  China’s outward foreign direct investment Stock, US dollar. Source: National Bureau of Statistics of China

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Index

A

An Accidental Brexit, viii ADB, see Asian Development Bank AfD, see Alternative für Deutschland Affordable Care Act, 24, 25 Africa, 15, 149, 189, 221, 233, 244, 246, 259, 265, 285, 307 Albania, 262 Alternative für Deutschland (AfD), vi, x, 16, 91, 168–171, 173, 175, 268, 299 Aluminum, 7, 13, 102, 115, 117, 141, 225, 244, 267, 304 Amazon, 263 America First policy, vii, 110 APEC, see Asia-Pacific Economic Cooperation Argentina, 89 ASEAN, see Association of Southeast Asian Nations

Asia, v–vii, xi, xiii, xiv, 14–16, 22, 23, 26, 29, 36, 39, 43, 86, 106, 108, 116, 152, 188, 192, 219–240, 242, 244, 246, 247, 253–257, 259, 261, 265, 269, 283, 286, 291, 293, 297, 299, 300, 302, 305 Asian Development Bank (ADB), 234, 246, 253, 264 Asian Infrastructure Investment Bank (AIIB), 247, 248, 253, 255, 259 Asia-Pacific Economic Cooperation (APEC), 234, 235 Association of Southeast Asian Nations (ASEAN), xiv, 14, 15, 23, 94, 152, 153, 155, 188, 189, 221, 222, 231, 235, 236, 238, 239, 242, 243, 246, 247, 255, 259, 264, 267, 269, 278, 289

© The Author(s) 2019 P. J. J. Welfens, The Global Trump, https://doi.org/10.1007/978-3-030-21784-6

345

346 Index

Austria, xiii, 39, 52, 145, 176, 234 Authoritarian, 26, 27, 156, 158 Automotive, 22, 101, 102, 126, 143, 149–151, 304 B

Balkans, 262 Bank for International Settlements (BIS), 30, 152, 182, 254, 261, 265, 267 Bank of England, 184, 268, 272, 295 Belgium, 145, 154, 167, 168 Bilateralism, vii, 25, 39, 120, 221, 246, 259, 264, 298, 302 Bolsonaro, Jair, 44, 94, 156, 157 Bonds, 10, 48, 86, 114, 121, 164, 165, 168, 178, 179, 184, 230, 274, 275 Bosnia and Herzegovina, 262 Brazil, 44, 89, 94, 146, 156–158, 220, 266, 307, 308 Brexit, vi, viii–x, xiii, 4, 14, 20, 21, 39, 44, 80, 89, 106, 122, 124, 134, 136, 153–156, 159, 162, 167, 175, 180–193, 220, 221, 226, 233, 244–246, 259, 265–267, 269, 277, 278, 284, 286, 287, 290, 292–297, 305, 312 Brexiteers, 136, 155, 157, 180, 193, 293 Brookings Institution, xi, 111, 113 Brussels, 293 Bulgaria, 242, 262 Bush, George H.W., x Bush, George W., x, 8, 9

C

Cameron, David, 159, 193, 226, 233, 287, 290 Canada, xii, xiii, 8, 13, 20, 55, 60, 102, 116, 117, 119, 126, 131, 141–143, 151, 173, 180, 189, 221, 225, 230, 235, 267, 281–305, 307, 312 Chile, 52, 235 China, v, vi, viii, xi–xiii, 7, 12–16, 20–23, 29, 30, 36, 38, 45, 47, 74, 90, 94, 103–106, 108, 110, 115, 117, 119, 121, 125, 127, 134, 136, 141–144, 146, 148, 149, 151–159, 162, 172, 179, 180, 192, 219–238, 241–249, 254, 255, 258, 259, 262, 265–267, 269–271, 276, 278, 284, 286, 290–292, 297, 299–301, 305, 308, 325–328 Clinton Administration, 74 Clinton, Bill, x Clinton, Hillary, 9, 19, 28, 29, 45, 266 Cohn, Gary, 93, 117, 118, 267 Cold War, xii, 10, 19, 43, 154, 158, 170, 243, 254, 268, 270, 271, 273, 290 Conservative Party, 185 Conte, Giuseppe, 134, 157, 164–165, 178, 179, 220, 233, 284, 299 Cooperation, v, xii, xiii, 3, 4, 15, 20–22, 34, 44, 93, 117, 134, 135, 172, 177, 179, 186, 189, 191, 224, 231, 234, 235, 244, 257–259, 262, 265–267, 269, 271, 278, 286

 Index 

Council of Economic Advisers, 7, 24, 45, 64–66, 70, 71, 86, 105 Croatia, 23, 262 Cuba, 64 Current account balance, 113, 123, 232 Czech Republic, 262 D

Democracy, 19, 26, 35, 91, 92, 154, 156, 233, 241, 269–271, 291, 293 Democratic Party, viii, 8, 9, 19, 36, 111, 131, 132, 169, 173, 174, 256, 265, 304 Denmark, 65, 66, 69, 71, 72, 81, 127, 278 Deregulation, 7, 8, 13, 78, 79, 93, 95, 161, 182, 184, 191, 273, 278, 284 Di Maio, Luigi, 164 Digital, viii, x, xiii, xiv, 9–11, 20, 22, 26, 28, 31, 41, 45–47, 60, 91, 92, 106, 127, 133, 142, 148, 161, 162, 168, 170, 173, 193, 224, 225, 234, 242, 246, 247, 259, 260, 264, 268, 269, 276, 283, 289–291, 293, 294, 300–302, 305 Digitalization, xiii, 4, 9, 12, 36, 269 Disintegration, xv, 180, 219, 244, 305 Domar rule, 113, 165, 183 E

Eastern Europe, 178, 243, 257, 262, 265, 266, 299–300 East Germany, 36, 169, 174

347

ECOWAS, 15, 155, 189, 246, 269 Education, 41, 46, 50, 51, 53, 60, 78, 110, 131, 165, 168, 174, 175, 184, 241, 262, 284, 318 Elections, v, xiii, 4, 8, 9, 11, 19, 25, 26, 29, 43, 44, 92, 93, 109, 119, 122, 132, 156, 159, 162, 165, 169, 177, 181, 265, 266, 269, 271, 279, 290, 296, 304 Electoral College, 8, 9 EIIW, see European Institute for International Economic Relations Estonia, 262 EU, see European Union Europe, v, ix–xv, 4, 5, 8, 14–16, 21–23, 26, 29, 36–40, 42–46, 53, 55, 56, 60, 80, 81, 86, 92, 106, 109, 115, 131, 135, 148, 149, 152–154, 160, 161, 165, 167–193, 221, 223, 232, 233, 244, 257, 259, 261, 262, 265, 268–270, 273, 274, 278, 283, 286, 289, 293, 307 European Central Bank, 155, 169, 182 European Coal and Steel Community (ECSC), 154, 167 European Commission, xxiii, 43, 148, 164, 165, 179, 180, 191, 226, 233, 271, 272, 276, 287, 295, 298 European Institute for International Economic Relations (EIIW), xiv, xxiii, 54, 61, 62, 82, 142, 143, 163, 190, 237–239, 243, 276, 277, 325 European integration, 14, 20, 167, 188, 262

348 Index

European Systemic Risk Board (ESRB), 267, 268, 294, 295 European Union (EU), v–vii, ix, x, xii, xiv, 4, 9, 12–16, 20–24, 28, 30, 34, 36, 39, 40, 43–47, 54, 56, 57, 59, 65, 70, 71, 79–81, 83, 84, 88, 94, 102, 103, 106, 108, 114, 115, 117, 119, 122–124, 126, 127, 133, 134, 136, 142, 146, 148–156, 158–165, 167–193, 219–225, 227, 229–240, 242, 244–246, 248, 249, 253–257, 259, 261, 262, 264–272, 275–278, 281, 284, 285, 287, 289, 291–302, 304, 305, 312, 314–316 Eurozone, 10, 15, 65, 89, 95, 122, 123, 156, 165, 178, 179, 182–184, 220, 270, 277, 278, 281–305 Export, xii, xiii, 12, 14–16, 23, 29, 30, 36, 38, 39, 44, 47, 76, 81, 84, 90, 102–106, 108, 113–118, 121–124, 130, 133, 141–144, 146, 149, 150, 152, 153, 177, 180, 187, 189, 190, 219, 220, 222, 226–232, 235, 236, 242, 243, 246, 257, 258, 261, 267, 269, 270, 281, 289, 291, 292, 302, 311

Finance, 78, 121, 164, 170, 184, 262, 275, 290 Financial Stability Board (FSB), 182 Finland, 66, 69 Fiscal policy, 20, 61, 85, 87, 90, 111–113, 120, 121, 165, 183, 254, 274 Five Star Movement, 164, 168, 178 Foreign direct investment (FDI), xiii, 7, 30–35, 81, 82, 90, 105, 106, 121, 122, 134, 181, 231, 232, 236, 242, 249, 259, 325–328 Foreign indebtedness, 114, 121, 152, 179, 183, 235, 272 France, vi, ix, x, xii, xiii, 4, 12, 20, 22, 37, 40, 52, 54, 56, 61, 63, 66–68, 70, 72, 76, 77, 84, 86, 101, 116, 131, 144, 146, 148, 151, 153, 154, 162, 163, 167, 168, 172, 174, 175, 177–179, 183, 226, 230, 235, 244, 253, 255, 262, 269, 284, 298, 302, 311 Free trade, vi, xii, 13, 101–103, 106, 108, 110, 116, 117, 126, 127, 131, 134, 142, 149, 151, 155, 162, 172, 180, 181, 185–187, 189, 192, 220, 221, 225, 229, 234, 245, 246, 254, 261, 263, 266, 277, 278, 309, 326

F

G

Farage, Nigel, 39, 44, 45, 134, 158, 159, 162 Federal Reserve, 48, 49, 51, 86, 112, 320

Gauland, Alexander, 169, 171–173 General Agreement on Tariffs and Trade (GATT), 4, 30, 188, 189, 254

 Index 

Germany, vi, ix–xiii, 4, 6, 12, 16, 20, 22, 32, 34, 36, 37, 39, 40, 43, 44, 52–54, 56, 57, 60, 61, 63, 66–68, 70, 72–74, 76, 77, 80, 81, 84, 86, 91, 114, 116, 122, 123, 131, 135, 144–146, 148, 150, 152–154, 158, 162, 163, 167–169, 171, 173–177, 179, 183, 186, 188, 226, 230, 235, 236, 239, 243, 253, 256, 259, 262, 268, 269, 272, 276, 285, 287, 289, 291, 292, 295, 298, 299, 311, 317 Gini coefficient, 23, 158, 282 Globalization, vi, viii, xi, xiv, 3, 4, 9, 12, 16, 21, 27, 29–32, 34, 74, 95, 103, 105, 116, 122, 125–127, 130, 134, 151, 152, 170, 173, 227, 232, 249, 255, 266, 269, 289, 291–293 Google, 91, 301 Gore, Al, 8 Gove, Michael, 193, 290 Government, vii, 3, 6, 7, 10, 13, 14, 24–26, 29, 30, 35, 38, 40, 43, 46, 47, 59, 60, 73, 74, 78–81, 86, 90, 103–106, 109, 111–115, 120, 127, 132–134, 155, 157, 159, 164–165, 168, 174–180, 182–184, 186, 190, 191, 193, 220, 226–228, 230, 232–235, 244, 247, 258, 263, 264, 266, 268, 269, 271–275, 277, 281, 282, 284–288, 290, 301, 305, 310, 311, 326 Great Recession, 108, 161, 268 Greece, 131, 167, 172, 179, 262, 271, 287 G20, 32–35, 119, 182, 254, 269, 284

349

H

Hassett, Kevin, 7, 64, 86 Health care, xiii, 4, 9, 22–25, 40, 50, 54, 56, 57, 59–63, 66, 75, 133, 148, 153, 226, 276, 277, 285, 286, 288, 289 Health insurance, vii, 22–24, 40, 45, 56–59, 63, 74, 83, 132, 133, 277, 286, 288, 289 Heckscher-Ohlin, 30, 126, 129 Heil, Hubertus, 35 Höcke, Björn, x Hong Kong, 235, 236, 288 Households, 4, 9, 11, 12, 23, 24, 29, 31, 45–51, 57, 73, 80–82, 92, 104, 109, 146, 162–165, 174, 176, 183, 274, 281–283, 285, 307, 320 House of Representatives, viii–ix, 8, 132 Hungary, 52, 133, 134, 156, 158, 178, 257, 262 I

Iceland, 23, 69, 71, 295 Immigration, vii, 7, 12, 13, 25, 28, 31, 40, 43–45, 110, 129, 132, 135, 149, 155, 158–160, 164, 167, 170, 172, 173, 177, 180, 226, 260, 261, 266, 268, 284, 287, 289, 292 immigrants, 12, 13, 28, 40, 41, 43, 45, 75, 78, 85, 159, 160, 170, 266, 285 Import, v, viii, 7, 13, 27, 33, 36, 38, 81, 90, 102, 103, 107, 108, 110, 112, 113, 115–117, 121, 122, 124, 127, 130, 167, 173,

350 Index

180, 189, 220, 221, 225, 226, 228–232, 235, 236, 244, 267, 292, 309, 325, 326 Income earners, viii, 4, 13, 32, 36, 38, 45–48, 78, 80, 159, 173, 265, 269, 283, 292 national, 21, 23, 36–38, 46, 56, 59, 60, 63, 102, 103, 115, 133, 148, 178, 185, 187, 188, 228, 230, 232, 233, 269, 288, 289, 308 per capita, ix, 21, 30, 36, 90, 101, 102, 109, 153, 162, 169, 174, 230, 231, 236, 242, 254, 278 pyramid, 4, 13, 24, 29, 46, 51, 105, 109, 115 real income, vi, xiv, 11, 35, 47, 59, 78, 83, 102, 107–109, 111, 113, 122, 149, 152, 163, 172, 173, 228, 229, 231, 232, 291 redistribution, 29, 38, 40, 46, 79, 83, 158, 282, 285, 289, 291 India, 89, 130, 132, 146, 151, 158, 170, 180, 192, 221, 235, 241, 242, 254, 300, 307, 308 Inequality, vii, x, xiii, xiv, 10–12, 23–25, 29, 31, 33, 36, 38, 41–45, 49–52, 75, 76, 79, 81, 85, 116, 158, 162, 182, 185, 269, 270, 281, 282, 286, 290, 291, 304, 305, 307, 317–318 Infant mortality, 4, 5, 22, 56, 60, 277, 319 Information and communication technologies (ICT), 29, 31, 32, 47, 85, 105, 106, 116, 242, 243, 283, 308

Infrastructure, 74, 153, 159, 165, 179, 227, 235, 245, 247, 262, 269, 277, 295, 298 Integration, xiv, 4, 14, 15, 103, 115, 116, 154, 155, 189, 219, 234, 259, 260, 269, 278 InterAction Council, xi International Court of Justice, vi, 3 International Monetary Fund (IMF), xi, xxiii, 4, 30, 39, 87, 89, 90, 119–121, 123, 152, 155, 226, 234, 243, 254, 257, 261, 272–274, 282, 283, 310–312 International organizations, vi, vii, xii, 3, 4, 14, 15, 19–21, 25–26, 29, 30, 41, 94, 120, 134, 151–155, 182, 193, 244, 247, 248, 253–261, 264, 265, 271, 278, 293, 297, 299 International Telegraphy Union, vi, 151 Internet, viii, 8, 11, 20, 26, 41, 45, 46, 91–92, 161, 193, 226, 233, 249, 260, 263, 264, 268, 269, 271, 290, 293, 301 Investment, viii, x, xii, 6, 7, 9, 14, 15, 30–34, 36, 45, 76, 83, 85–86, 88–90, 94, 95, 104, 105, 107, 109, 110, 113, 118, 119, 121, 122, 126, 129, 130, 134, 143, 144, 148, 153, 156, 164, 172, 181–184, 187, 191, 192, 221, 227–229, 231–233, 235, 236, 241, 242, 245, 246, 260–262, 267, 272, 274, 275, 293, 295, 298, 301, 317, 325, 326 Ireland, 12, 45, 144, 145, 160, 161, 183, 273

 Index 

351

Italy, 11, 54, 61, 76, 77, 84, 101, 116, 131, 133, 135, 144, 154, 157, 158, 162–165, 167, 168, 172–174, 177–179, 183, 220, 230, 233, 234, 243, 262, 266, 278, 284, 292, 295, 299, 311

Life expectancy, 4, 23, 40, 54, 56, 60–62, 133, 148, 265, 277, 286, 288, 319 Lithuania, 262 London, 8, 124, 156, 170, 180, 182, 183, 261, 263, 278, 293

J

M

Japan, 13, 20, 47, 76, 87, 94, 114, 119, 130, 131, 144, 148, 149, 153, 192, 219–221, 230, 235, 236, 242, 246, 253, 256, 257, 259, 283, 300, 301, 305, 312, 317 Jefferson, Thomas, 5, 6 Johnson, Boris, 45, 162 Johnson, Lyndon B., 11, 120

Macedonia, 262 Macron, Emmanuel, xii, 177 Malaysia, 235, 236, 242, 247 May, Theresa, 134, 159, 180, 190, 226, 266, 297 Media, 10, 11, 20, 27, 28, 45, 87, 92, 161, 170, 193 Medicare, 25, 56, 57 Mercosur, 15, 94, 155, 188, 189, 246, 259, 264, 269 Merkel, Angela, x, 44, 81, 168, 175, 177, 287, 299 Mexico, xii, 7, 13, 20, 46, 105, 116, 117, 126, 129, 131, 141–143, 151, 157, 189, 221, 225, 235, 263 Mid-term elections, vii, viii, 8, 9, 44, 133 Mnuchin, Steven, 117 Mobility, 30, 32, 38, 51, 52, 59, 76, 84, 102, 105, 126, 129, 133, 283, 291, 318 earnings, 51, 52 upward, 84 Montenegro, 262 Multilateral, see Multilateralism Multilateralism, xiii, 4, 14, 16, 19, 20, 25, 94, 119, 120, 135, 151, 181, 231, 246–248,

K

Kazakhstan, 223 Kennedy, John F., 27 Korea, 13, 20, 76, 117, 118, 185, 192, 230, 235, 236, 242, 244, 246, 259, 312 L

Labour Party, 185 Latin America, xii, xiii, 26, 29, 39, 44, 45, 52, 78, 90, 153, 188, 221, 233, 256, 259, 265, 266, 287 Latvia, 262 Lega, 164, 168, 178 Lehman Brothers, x, 9, 95, 272, 274, 275

352 Index

253–256, 259, 261, 265, 270, 278, 284, 286, 293, 305 Multinational, 89, 103, 105, 107, 123, 126, 129, 130, 187, 189, 228, 229, 232, 242 Multinational firms, 16, 232 Mussolini, Benito, 11 N

NAFTA, see North American Free Trade Agreement Nationalism, v, x, 14, 16, 25, 26, 94, 153, 159, 160, 162, 167, 169, 177, 193, 234, 244, 245, 257, 259, 261, 266, 269, 270, 278, 289, 305 National security, 7, 13, 117, 225, 226, 267, 304 NATO, 6, 13, 160, 185, 186, 188, 192, 224, 225, 255, 265, 271, 273 Navarro, Peter, 118 Netherlands, 5, 27, 41, 131, 154, 167, 172, 176, 230, 236 New York, viii, x, xiv, xv, xxiii, 156, 180, 182 The New York Times, x North America, vii, xiv, 22, 23, 116, 221, 269, 293 North American Free Trade Agreement (NAFTA), 115, 117, 126, 131, 141–144, 189, 221, 225 North Korea, 64, 117 Norway, 23, 65–67, 69, 84, 127, 151, 286, 295

O

Obama Administration, 7, 9, 24, 43, 74, 146, 150, 186, 187, 226 Obama, Barack, x, 9, 39, 75, 132, 186, 221, 227, 266 Obamacare, 9, 25 OBOR, see One Belt One Road One Belt One Road (OBOR), 223, 235, 244, 247 Orban, Victor, 134 Organization for Economic Cooperation and Development (OECD), ix, 12, 31–34, 36, 40, 51–54, 60–62, 66, 74–85, 94, 95, 105, 106, 108, 112, 124, 125, 134, 135, 144–147, 158, 159, 161, 163, 182, 190, 191, 226, 231, 239, 243, 246, 254, 258, 261, 263, 265, 268, 271, 276, 283, 285–287, 294–301, 317–319, 325 P

Pegida, 169 Piketty, Thomas, 75, 76 Poland, 131, 133, 156, 158, 177, 178, 257, 262 Population, 4, 22, 43, 48, 56–58, 60, 79, 83, 105, 130, 134, 135, 145, 146, 172, 173, 184, 221, 234, 270, 285, 286, 311, 318, 320, 326 Populism, v–viii, x, xii–xiv, 4, 6, 8, 11–16, 19, 20, 25–29, 34, 35, 38, 39, 41–45, 91–92, 94, 95, 115, 120, 127, 131, 133, 135,

 Index 

153–165, 167–193, 224, 232–234, 245, 248, 257, 261, 262, 264–266, 268–271, 278, 284, 286, 287, 289–292, 296–299, 302, 305 Poverty, 23, 73–74, 146, 147, 158 Propaganda, 28, 174, 290 Protectionism, v, xiii, 15, 38, 90, 102, 104, 106–110, 119, 121, 124, 151, 153, 162, 169, 177, 227, 228, 234, 242, 244, 258, 261, 265, 269, 284, 289, 305 Q

Quantitative easing, 10 R

Radicalism, viii, x, 8, 16, 25, 27, 39, 45, 46, 79, 91, 93, 169–171, 183, 234, 264, 268, 269, 290, 291 Reagan, Ronald, x, 10, 11, 78, 111, 115 Real wages, 47, 85, 105, 107, 130 Redistribution, xiii Referendum, vi, 20, 21, 44, 45, 74, 133, 155, 162, 175, 180, 184, 186, 193, 267, 287, 290, 294 Refugees, x, 41, 43, 44, 127, 160, 287 Republican Party, viii, xii, 8, 9, 13, 19, 27, 78, 111, 131, 253, 256, 266, 288, 304 Republicans, see Republican Party Ricardo, David, 94, 101, 150, 258 Romania, 242, 262

353

Ross, Wilbur, 118 Rule of law, 14, 19, 21, 27, 91, 92, 158, 170, 171, 225, 233, 287, 293 Russia, 3, 27, 94, 133, 136, 151, 153, 158, 159, 162, 172, 223, 235, 244, 255, 262, 265, 297, 300, 302 Rybczynski theorem, 127 S

Salvini, Matteo, 164 Samuelson, Paul, 150 Schengen, 45, 160 Schmidt, Helmut, xi Schumpeter Society, 5 Serbia, 262 Singapore, 23, 170, 235, 236, 242, 247, 288 Slovakia, 12, 262 Slovenia, 262 Smith, Adam, 101, 150, 162 Social Market Economy, vii, 21–23, 40, 70, 191, 269–271, 286, 299, 305 Social media, 293 South America, 15, 16 Soviet Union, xii, 16, 43, 154, 254, 257, 270 Spain, 33, 39, 54, 84, 131, 144, 145, 154, 172, 177, 179, 262, 284, 299, 311 Steel, v, 7, 13, 102, 115, 117, 141, 225, 244, 267, 304 Stocks, 33, 45, 48, 105, 107, 178, 236, 242 Stolper-Samuelson theorem, 126

354 Index

Sweden, 65, 66, 69, 80, 81, 84, 131 Swiss National Bank, 33 Switzerland, vi, x, xiii, 9, 10, 13, 23, 32, 34, 60, 73–75, 103, 127, 133, 173, 175, 230, 262, 273, 286, 292 T

Tariff, 3, 188, 309 import, v, viii, 7, 13, 27, 38, 90, 103, 107, 108, 110, 112, 115–117, 121, 122, 127, 149, 151, 167, 180, 189, 220, 221, 225, 228–232, 235, 244, 267, 292, 304, 309, 310, 325, 326 non-tariff barrier, 109, 119, 187, 226, 228 optimum, 232, 310, 327 Tax, vii, xiii, 7, 12, 13, 24, 25, 27, 32–35, 37, 57, 60, 78–81, 85–89, 93, 102–106, 110–112, 117, 120, 125, 133, 146, 158, 164, 177, 182, 184, 191, 227, 228, 263, 269, 270, 276, 281–285, 292, 308, 309, 311 corporate tax, 34, 57, 78, 85, 86, 104, 182–184 evasion, 34 income tax, 3, 10, 32, 34, 35, 46, 47, 60, 78–80, 85, 87, 104, 283, 285, 326 policy, 12, 13, 24, 34, 298 Tax Cuts and Jobs Act, 85, 87 Value-added tax, 104 Taylor rule, 112 TPP, see Trans-Pacific Partnership

Trade, vi, viii, xii–xiv, 7, 13–15, 20, 21, 25, 27, 30–32, 39, 81, 83, 84, 90, 94, 101–110, 113, 115–123, 125–127, 129–133, 136, 141, 142, 144, 146, 150–153, 155, 159, 167, 172, 173, 180, 181, 187–189, 191, 192, 219–230, 232, 234–236, 244–247, 254, 255, 257–259, 261–264, 266, 267, 270, 276, 293, 297–299, 304, 305, 309, 311, 312, 317 Trade Expansion Act of 1962, 27, 150, 305 Transatlantic, v, x, xi, 4, 15, 21, 22, 40, 53, 54, 56, 67, 119, 123, 153, 185–188, 192, 224, 267, 284 Transatlantic Banking Crisis, 8, 10, 95, 108, 161, 168, 175, 268, 274, 290 Transatlantic Trade and Investment Partnership (TTIP), 44, 119, 149, 185–187, 226, 227, 259 Trans-Pacific Partnership (TPP), vi, 43, 119, 142, 225, 234, 235, 246, 259 Trump Administration, vi, ix, xii, 7, 12, 20, 21, 25, 26, 38, 39, 79, 85, 89, 90, 103, 104, 106, 107, 109, 111, 115, 119, 123, 124, 126, 141, 142, 144, 150, 153, 164, 167, 179–181, 188, 219, 221, 224, 227, 230, 233, 235, 244, 246, 248, 259, 266, 278, 287, 289, 292, 293, 301, 302 Trump, Donald, v–x, xii–xiv, 4, 6–16, 19–22, 25–29, 38–41,

 Index 

44–46, 61, 70, 74, 75, 79, 85, 89–91, 93, 94, 102–126, 130, 132–134, 141, 142, 144, 150–154, 156–160, 162, 164, 167, 169–171, 179–182, 185–188, 191–193, 219, 221, 224, 225, 227, 228, 230, 233–235, 242, 244–248, 253, 256, 258, 259, 263, 264, 266–268, 271, 278, 279, 282, 283, 287, 289, 290, 292, 293, 297, 301, 302, 304–305 Trumpism, v, xii, xiii, 7, 15, 19–95, 164–165, 180–183, 265, 290, 291, 302 TTIP, see Transatlantic Trade and Investment Partnership Turkey, 20, 27, 43, 45, 89, 120, 133, 155, 158, 225, 287 Twitter, 10, 22, 46, 90, 91, 157, 304 U

UK, see United Kingdom UN, see United Nations Unemployment, 81, 85, 86, 109, 144, 157, 177, 184, 226, 277, 285, 317 United Kingdom (UK), vi, ix, xi, 8–10, 12, 19–22, 34, 36, 37, 39, 40, 44, 45, 53, 54, 61, 76, 77, 80, 81, 83, 89, 94, 95, 101, 106, 116, 117, 122, 134, 136, 144, 154–157, 159–163, 167, 168, 172, 175–177, 179–188, 190–193, 219–226, 230, 233, 244–246, 253–256, 262, 263, 265, 267–269, 277,

355

278, 284, 286, 287, 290, 292–299, 302, 305 United Kingdom Independence Party (UKIP), 39, 44, 134, 158, 233 United Nations (UN), x, xiv, xv, xxiii, 39, 120, 160, 170, 222, 256–261, 265, 287 United States (US), v–xv, xxiii, 3–16, 19–95, 101–136, 141–154, 156–164, 167, 171–173, 175, 179–193, 217, 219–240, 242–249, 253–259, 261–279, 281–305, 307, 310, 311, 314–318, 320–321, 325–328 Universal Postal Union, vi US, see United States V

Venezuela, 64, 153, 266 Voters, vii, viii, xiii, 7–12, 19, 20, 26, 29, 38–41, 44–46, 90, 115, 132, 161, 162, 165, 169, 171, 177, 268, 269, 274, 286 W

Washington DC, xi, xii, xiv, xxiii, 21, 154, 180, 282 Wealth, 31–34, 42, 48–51, 78, 93, 105, 162, 179, 229, 263, 281 Welfens, P.J.J., xiv, xxiii, 19, 21, 31, 71, 103, 110, 143, 167, 169, 181, 184, 186, 225, 227, 259, 264, 275–277, 284, 292, 310 West, v, x, xiii, xv, 9, 42, 151, 157, 158, 170, 173, 174, 189, 244, 290, 293, 305

356 Index

Western Europe, 4, 16, 60, 150, 262, 301 Williamson, Gavin, 296 Workers skilled, 27, 31, 32, 41, 46–48, 77, 85, 105, 126, 127, 145, 284, 317 unskilled, 11, 12, 27, 31, 32, 38, 40, 41, 47, 85, 116, 127, 129, 233, 276 World Bank, xi, 56, 63, 107, 142, 157, 190, 221, 236, 239, 241, 254, 260, 261, 276, 325 World Trade Center, x

World Trade Organization, xiv, 4, 14, 16, 30, 108, 119, 122, 141, 146, 151, 152, 181, 188, 189, 219, 226, 254, 255, 257–259, 265, 292, 305 X

Xenophobia, 14, 16, 40, 94, 171, 193, 278 Y

Yellen, Janet, 49–53