MNI INTERVIEW2: US And China Lack Power To Disentangle- Sheard

U.S. and China trade connections are too strong for their economies to disentangle, but they also lack the political ability to make the deep changes to significantly ease imbalances underlying their tensions, former S&P Global vice chairman Paul Sheard told MNI.

“I don’t think governments have strong levers that they can pull. You can’t just suddenly overnight turn China into a consumption-led economy. You can’t suddenly overnight change the basic fabric of the U.S. economy,” he said in an interview Thursday in Washington.

China's government is also more fragmented than most investors think, meaning it has less power to order any kind of reset on exports, he said.

“They think the central government is all powerful, whereas a lot of the political power is diffused into the provinces, and the institutions of the central government, fiscal and others, are actually quite weak,” Sheard said.

Slashing the U.S. budget deficit would also be disruptive to the global economy and to China, which would also have to make a sudden adjustment, Sheard said. 

“You can kind of steer those ships” but that's about it, he said.

NO FISCAL DOOMSDAY

At the same time, concerns over U.S. fiscal imbalances are overstated, according to Sheard, who said America's economy is creating massive wealth with artificial intelligence companies and a good part of its public debt is held by the Federal Reserve and other parts of government. (See MNI INTERVIEW:Tariffs Freeze Fed, Court Global Recession-Fatas)

“This sort of fiscal doomsday scenario, we hear about it all the time… I just have kind of a hard time worrying about it.”

Sheard spoke at an IIF conference where former U.S. Asia trade adviser Evan Medeiros noted China and the U.S. appear to be engaged in a battle over strategic supply chains but so far Donald Trump doesn't have a clear idea how much economic pain he's willing to take. Former Australian PM and now ambassador to the U.S. Kevin Rudd also told a panel “I do not see evidence of decoupling” but rather “de-risking.”