Trumpian Volatility Is Forcing Policy Changes in China

China Mustn't Lose Time in Shifting the Key Driver of Its Economy to Domestic Demand

- QIYUAN XU

History may rhyme, but the economic drama now unfolding in the US defies historical reason. When the US Federal Reserve's technocrats collide with an inexperienced and capricious presidential administration, conventional macroeconomic tools quickly become impotent. In the past, when the US faced acute economic upheaval, the government devised macro-policy responses aimed at reducing uncertainty, restoring confidence, stabilizing markets, and reigniting investment and consumption. This was true after the 2008 financial meltdown and the 2020 Covid shock. The 2023 run on Silicon Valley Bank did not spiral into a broader crisis because of the government's swift intervention.

But these crises were largely exogenous in nature, arising from the excesses of a poorly regulated financial sector (2008) and a once-in-a-century pandemic (2020). The US economy's current travails, by contrast, can be traced directly to the president, who has emerged as the economy's most destabilizing factor. In this context, traditional policy instruments are not fit for purpose.

Until late last year, the US economy was growing at a healthy clip. Following Donald Trump's victory in the November presidential election, moreover, both stock markets and the US dollar surged, as investors sought to profit from his promised tax cuts and deregulation. Markets seemed confident that the economy would be Trump's top priority and that his more extreme pledges of disruption were merely campaign bombast.