Some thoughts on the Trump-Xi Summit
Special points to highlight in this report:
* The Trump-Xi summit can produce a temporary accommodation between Washington and Beijing, but the underlying conflict between the US and China is about both the very different roles they play in global imbalances and the very different forms of leverage each side possesses: China has the power to restrict supply, while the United States has the power to restrict demand.
* Over the short term, constraining supply is likely to be more painful for the US. Over the medium term, restricting demand is likely to be far more painful for China.
* Contrary to widely-held beliefs in China, the Plaza Accord did not lead to Japan’s “lost decades” of stagnation. The problem was that Tokyo’s subsequent policy response did much to undermine and even exacerbate the adjustment it was supposed to facilitate. For China, the central lesson is that currency appreciation can be part of any real attempt to rebalance, but it must be aligned with, and not reversed by, credit and interest-rate policies.
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