Crucial to the US election? It's the Chinese economy, stupid



As an economic forecaster, I am frequently asked what I am assuming about Tuesday's US Presidential election.

The truth is nothing at all. Of course, I know no more about the likely result than anybody else. More importantly, I am acutely conscious of the power of impersonal economic forces to overwhelm Presidents (Xetra: A1CVKP - news) and Prime Ministers whatever they believe, and whatever they say during election campaigns.

It is not that elections never have any bearing on the economy. Sometimes they clearly do as with the 1979 election in this country, which shot Mrs Thatcher to power. But much of the time elections change remarkably little. Moreover, politics is full of paradoxes. Sometimes political change affects the economy in unexpected ways.

In the recent French election, M. Hollande campaigned on the merits of growth versus austerity. Once in power, however, he has followed broadly the same macro path as Sarkozy, and has just enacted the toughest French budget in living memory. In America, despite the Democrats' long-standing reputation for tax and spend, it was the Democrat Bill Clinton who turned the fiscal deficit into a surplus.

On the face of it, the differences between President Obama and challenger Romney are clear enough, particularly over tax and spending. President Obama believes in state intervention and thinks that the rich should "pay their fair share". Mr Romney believes in individualism, markets and low taxes for all. He is appalled by the fiscal deficit but says that higher government spending is the problem and lower taxes the solution. Quite how he would manage to pull off this conjuring trick is another matter.

For both candidates, the policy details are sparse. Most importantly, we have no information on how they would react if their economic presumptions proved unfounded.

Interestingly, a switch of US Presidents usually has less economic impact than the equivalent change in almost any other western country. For the US President often wields remarkably little economic power, especially when Congress is divided. As things stand, whichevercandidate wins the presidency, it looks unlikely that he will have a majority in both Houses of Congress. This would severely inhibit his ability to get things done. Meanwhile, monetary policy is determined by the Federal Reserve, which is independent.

Admittedly, the President controls the appointment of the Fed's Chairman. The current incumbent, Ben Bernanke, is up for renewal in early 2014 and Mitt Romney has made it clear that he would not re-appoint him. But even if he appointed someone more to his liking there is no guarantee that the new incumbent would do his bidding.

Romney's opposition to Bernanke has much to do with the latter's policy of Quantitative Easing, which is anathema to many on the Right, who believe in "sound money". But quite how much of their beliefs would survive their first tutorial in Economics 101 I have my doubts.

I suspect that Romney's promised tough stance on China could prove to be the most important difference between the candidates. Romney has promised that on day one of his Presidency he would declare China "a currency manipulator".

If the US Treasury finds that a country is manipulating its currency, the Trade Act requires it to initiate negotiations with that country to ensure a foreign currency exchange rate adjustment that eliminates the unfair trade advantage. The US Treasury has not found currency manipulation since it last cited China between 1992 and 1994. It had previously cited Taiwan in 1992-3 and Taiwan and Korea in 1988-9.

On these occasions, according to the Treasury, "all three made substantial reforms to their foreign exchange regimes". In addition, their currencies appreciated and external trade balances declined significantly until they reached the point at which the countries were removed from the list of offenders.

Of course, Mr. Romney's determination to mark China out may wilt when faced with the realities of power. But I have long believed that American policy on China has been remarkably weak. The truth is that both China and the United States could gain from a Chinese switch away from reliance on net exports towards consumption.

The stakes are high. If China bends, this could be a vital step in rebalancing the world economy, which would have beneficial effects for us too. If China resists, this could be the start of the long-feared trade war, reminiscent of the protectionism that precipitated a collapse of world trade in the 1930s, and which played such a major role in the Great Depression.

So the China factor alone could have major implications for markets. Presumably they will already have made assumptions about the full ramifications of the election result. But what?

You can never be sure. Consequently, even if I were miraculously to be told now the result of tomorrow's election I would still not know whether to buy or sell the US dollar/bonds/equities/gold/property or anything else. Mind you, that may be why I am a jobbing economist and not a star investor.

Roger Bootle is managing director of Capital Economics

Market Data

  • Currencies
    NamePriceChange% Chg
  • Commodities
    NamePriceChange% Chg


  • Trade now

    Trade now

    Create account for free with the No.1 spread betting and CFD provider. Losses can exceed deposits. More »