Trump’s Trade War Washes Up on Australia’s Shore

WASHINGTON — Australia’s financial system is experiencing its 28th yr of a record-shattering growth, with robust employment progress and excessive financial potential.

But the Reserve Bank of Australia reduce charges to a report low final month — a improvement that underscores how intertwined the worldwide financial system has turn into and the way large a menace President Trump’s commerce warfare poses in such an atmosphere.

On paper, there isn’t a cause Australia’s financial system ought to be in large hassle.

The nation has seen fast, immigration-fueled inhabitants progress, one thing many developed markets lack. It appears to be weathering the fallout from a home housing market cool-off, and whereas sluggish wage beneficial properties are weighing on client spending, pay will increase have been lagging partly as a result of staff are pouring into the job market and protecting competitors for workers at bay. Crucially, the nation has little publicity to world manufacturing provide chains, a undeniable fact that insulates it from the early fallout of America’s commerce struggle with China.

But the central financial institution’s potential to goose pay, obtain regular value will increase and maintain the job market increasing hinges partly on rates of interest in different nations. More than 30 central banks have reduce rates of interest this yr in response to slowing world progress, Mr. Trump’s commerce warfare and different geopolitical turmoil.

“International linkages have risen dramatically over recent decades,” Mark Carney, the head of the Bank of England, said at the Jackson Hole gathering, an annual meeting hosted by the Federal Reserve Bank of Kansas City. And because America’s currency and debt markets are so central to the global financial system, the nation’s political and economic dramas guide the world’s.

“The global financial cycle is a dollar cycle,” Mr. Carney said. Bank of England research indicates that increases in America’s policy interest rate have twice the effect on foreign growth that they did back in the 1990s, even though America now makes up a smaller share of the global economy, Mr. Carney said.

When the Fed moves interest rates or Mr. Trump ramps up trade tensions, it echoes across the world through currency repricing and slower growth.

There are hazards to such an integrated global monetary and financial system. It leaves central banks with low interest rates to begin with, and then little ability to diverge from their trading partners’ monetary policy settings. At the first sign of trouble, many nations may lower rates in tandem.

That seems to be happening now. As the United States, the eurozone and Japan reorient toward rate cuts and other forms of monetary economic help this year, central bankers across emerging markets have slashed their own borrowing costs. Monetary authorities could enter the next recession with relatively little ammunition, heightening the risk that a garden-variety economic slowdown could turn into a drawn-out, painful global slump with widespread costs to jobs and prosperity.

And while the global economy’s brittleness is rooted in slow-moving economic fundamentals, Mr. Trump’s trade war could be the spark that sets off the time bomb.

Mr. Trump looks at a tightly intertwined global economy and sees a winner-take-all game in which the United States can and should prosper at the expense of other countries. He has criticized the Federal Reserve for not cutting rates more quickly, saying the central bank is putting the United States at a disadvantage to other nations that are ushering in low rates.

“Our Federal Reserve cannot ‘mentally’ keep up with the competition – other countries,” Mr. Trump said in a tweet on Wednesday. “At the G-7 in France, all of the other Leaders were giddy about how low their Interest Costs have gone. Germany is actually ‘getting paid’ to borrow money – ZERO INTEREST PLUS! No Clue Fed!”

Just as central bankers spent the weekend discussing how countries’ economic fates have become closely tied at their Jackson Hole symposium, Mr. Trump announced on Twitter that he would put additional tariffs on China and would look for ways to stop domestic businesses from operating there.

He is still contemplating tariffs that would harm German carmakers, and earlier this year, Mr. Trump threatened tariffs on Mexico as a way to pressure the country to stop the flow of migrants across the southern border.

Mr. Trump’s next steps are clearly top of mind going forward in Australia.

“Australia has been a major beneficiary from the rules-based global trading system over many decades,” Guy Debelle, deputy governor of the Reserve Bank of Australia, said in a recent speech. “The current threats to that are clearly a major risk for the Australian outlook over a longer horizon.”

While drawn-out trade battles are hurting Chinese growth and weighing on global manufacturing, central bankers around the world generally echo Mr. Debelle: They are less worried about the direct effects than about the uncertainty caused, the prospect of escalation and the potential for a paradigm shift.

“The combination of the structural imbalances at the heart of the international monetary system and protectionism are threatening global momentum,” Mr. Carney said.

And a wave of rate cuts that work partly through making domestic currencies cheaper are an imperfect fix to the continuing trade tensions.

“If all central banks ease similarly at around the same time, there is no exchange rate channel,” Mr. Lowe said over the weekend. “We trade with one another, not with Mars.”

The pain may even be spilling back into the United States itself in ways that the Fed will struggle to offset. Factories are slowing in the United States, as is the case around the world, and consumer confidence showed early signs of softening in preliminary August data.

“While monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade,” Fed Chair Jerome H. Powell said last week.

The global backdrop could take some oomph out of Fed policy. The central bank cut interest rates for the first time in more than a decade in July, but as uncertainty slows investment and pulls down the global interest rate setting that neither stokes nor slows growth, it could also lower the dividing line between stimulus and restrictive policy in America.

“More than in the past, the Fed is always going to feel like chasing a moving target,” Adam Posen, the president of the Peterson Institute for International Economics, said in an interview.

And that could leave it struggling to lower rates fast enough to bolster the economy.

“Fed policymakers still risk lagging behind,” Joachim Fels, a global economic adviser at Pimco, wrote in a research note this weekend. Appropriate policy settings, he wrote, are increasingly “hobbled by global fetters.”

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