Wed, Feb 26, 2020 page10

• China trade war to have lasting effects: Fed official

  UNCERTAIN OUTLOOK: Loretta Mester said that foreign companies reorienting their supply chains and sluggish investment threaten the US economy’s growth potential

  • AFP, WASHINGTON
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  A trade conflict with China over the past two years has likely left a mark on the US economy, even with an agreement to defuse the situation, a US Federal Reserve official said on Monday.

  An outbreak of COVID-19 in China adds another risk factor to the outlook, which otherwise seemed poised to provide steady growth, Federal Reserve Bank of Cleveland President Loretta Mester said.

  “At this point, it is difficult to assess the magnitude of the economic effects, but this new source of uncertainty is something I will be carefully monitoring,” Mester said of the epidemic.

  With the partial agreement signed with China to call a truce in the dispute with Beijing — despite leaving many tariffs in place — as well as a new continental free-trade pact with Canada and Mexico, Mester said that the trade picture is “somewhat better” heading into this year.

  “Nevertheless, some long-lasting effects arising from the trade war are likely,” she said in a speech to the National Association for Business Economics.

  While the reduced uncertainty means businesses that had put plans on hold might now be more likely to invest, some foreign companies “have reoriented their supply chains away from US firms, which means these exports may be permanently lost,” she added.

  Sluggish investment is a source of concern, too.

  “Without investment in new technologies and capital, productivity will continue to be weak, dampening the [US] economy’s growth potential and living standards,” Mester said.

  Mester, a voting member of the Fed’s interest rate-setting committee this year, was relatively upbeat about the economy, which she said should continue to perform well with a strong job market and growth of about 2 percent, slightly slower than last year.

  The epidemic in China has cast a cloud of uncertainty over the outlook and is hard to compare with past health issues, like the SARS epidemic in 2003, which caused a minor slowing in the US economy, she said.

  “China was not as big a player in the global economy back then as it is today, so there is the potential for a larger impact” if supply chains are disrupted or investment postponed, Mester said.

  “On the other hand, China now has more resources with which to address the epidemic than it had in 2003,” which might mean “less protracted” damage to the economy, she said.

  US Secretary of the Treasury Steven Mnuchin said that he does not expect the coronavirus outbreak to have material effects on the “phase one” US-China trade deal, although that could change as more data becomes available in the coming weeks.

  Mnuchin, in an interview with Reuters late on Sunday in the Saudi Arabian capital, Riyadh, cautioned against jumping to conclusions about the effects of what he called a “human tragedy” on the global economy, or on companies’ supply chain decisions, saying that it was simply too soon to know.

  China has been focused on the virus for now, he said, but Washington still expects Beijing to live up to its commitments to buy more US products and services under the trade deal.

  “I don’t expect that this will have any ramifications on phase one. Based on everything that we know, and where the virus is now, I don’t expect that it’s going to be material,” Mnuchin said.

  “Obviously that could change as the situation develops. Within the next few more weeks, we’ll all have a better assessment as there’s more data around the rate of the virus spreading,” he said.

  Additional reporting by Reuters
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