Trade Friction Will (Is) Emerge (ing)

TW: The Pettis China economics blog is very good, Mike Pettis is a professor working at a Chinese university in Beijing. He provides much needed perspective from outside our borders. He can be a bit wonky (a kind way of saying speaking above your head and mine at times) but his stuff is good.

He is quite concerned about emerging nationalistic economic behavior. Such behavior can take many forms, overt protectionism (e.g. tariffs, quotas etc.) is one but likely not the primary risk the world economy faces. A race to the bottom to lower currency exchange rates is one, the aggressive pursuit of exports (as opposed to spurring domestic demand) is another, lack of cooperation on fiscal stimulus yet another.

Another very large risk is merely incompetence on the part of various leaders. Right now the Western governments and the BRICs are playing more or less nicely economically with each other but for how much longer if things continue to contract?

From the Pettis blog:

"Earlier this week Ambrose Evans-Pritchard had an article in the UK paper The Telegraph which starts off with “For the first time in my life, I am starting to feel twinges of anti-German sentiment.”

The article goes on to lambaste the German government, and especially German finance minister Peer Steinbrück, for what Paul Krugman earlier called “boneheadedness” in refusing to participate in the European fiscal expansion and, worse, for calling British and French programs “crass Keynesianism.”

According to Krugman:
The world economy is in a terrifying nosedive, visible everywhere. The high degree of European economic integration gives Germany a special strategic role right now, and Mr Steinbrück is doing a remarkable amount of damage. There’s a huge multiplier effect at work; it is multiplying the impact of German boneheadedness.

Evans-Pritchard explains why a number of European countries, led by France and England, are so angry: Put bluntly, Germany is pursuing a beggar-thy-neighbour policy. It is not fulfilling its responsibilities as the world’s top exporter and pivotal power of Europe’s monetary union. It is leaching off global demand, even as it patronizes Anglo-Saxons, Latins, and Slavs. No doubt binge debtors in the Anglosphere are much to blame for this crisis. But Germany rode the boom too. It made those Porsches and BMWs driven by the new rich. Its banks are among the most leveraged in the world.

Nor should we not forget that the European Central Bank set interest rates at recklessly low levels early this decade to help Germany out of a slump...

The point he is making is that the imbalances were not created simply by “binge debtors in the Anglosphere” but also by those countries that subsidized directly or indirectly overproduction, which ultimately have had much to do with the very conditions that led to consumption binge. This includes not just Germany but any of the countries that created persistent and high trade surpluses...

What does all this have to do with China? The reasons I bring this up is because it is, I think, a foretaste of the type of nasty battles that are likely to erupt between the trade-surplus and trade-deficit countries as global demand continues to contract. The overconsuming trade-deficit countries cannot reduce their overconsumption except with a collapse in production (and sharply rising unemployment) if the overproducing countries do not also adjust. Furthermore, fiscal expansion aimed at generating employment in countries with large trade deficits will not be nearly as effective as they might be if they are not matched with programs in trade surplus countries (essentially demand boosting fiscal programs) that prevent domestic demand from bleeding out the trade account..."

http://mpettis.com/2008/12/germany-is-fighting-with-europe-can-china-be-far-behind/