The World Economic Center is experiencing a historic transition from the leading advanced nations to the large emerging countries. Protectionism cannot reverse the trend.
By Dan Steinbock (China Daily); 2010-04-23
In early April, US Treasury Secretary Timothy Geithner decided to delay the release of the highly anticipated semi-annual currency report to Congress.|
The Obama administration opted for a time out, but the Congress did not. Many lawmakers on Capitol Hill will continue to push for revaluation of the renminbi. Yet the concern is misplaced.
Due to the rapid and historical deterioration of public finances in the advanced economies, there is now a shift in the sources of growth from the developed world to the emerging world.
In the early moments of the global financial crisis, the dramatic collapse of world trade was relatively worse than in 1929-30.
The good news is that the downward spiral in global trade volume has abated since summer 2009. The bad news is that the Baltic Dry Index - a broad measure of world trade - remains more than 70 percent below its all-time high.
In the current environment, the protectionist inclinations of the advanced economies are understandable but self-defeating.
In 1930, the Smoot-Hawley Tariff Act raised US tariffs to record levels, which sparked retaliatory tariffs by US trading partners. Instead of promoting employment, these policies contributed to the severity of the Great Depression.
Today, legislators in the advanced economies are flirting with new protectionism. They are playing with fire.
For sustained recovery, the US economy needs to generate some 100,000-120,000 new jobs on a monthly basis. Would appreciation make a difference?
With a substantial currency appreciation, Chinese exports in the US would simply be replaced by those from other low-cost countries, such as Vietnam and India. After all, Washington's trade deficits did not start with China, but with postwar Germany, then with Japan's export-led growth, followed by the East Asian tigers.
A revaluation would not result in new US jobs, but it would increase the inflation rate. Wal-Mart's low prices might no longer be so low. US consumer welfare would suffer from higher prices. The export competitiveness of US multinationals operating in China would deteriorate.
Nor does China account for the entire US deficit. Last year, China's share was less than 38 percent, about the same as the combined share of Mexico, Canada, Japan, Germany and Ireland. Yet, the US trade deficit has not been attributed to the undervaluation of the Mexican peso, the Canadian dollar, the Japanese yen, or the euro.
The US has a merchandise trade deficit, but a service trade surplus with China.
Their bilateral economic relations also include foreign direct investment (FDI). US companies have been able to engage in substantial FDI in China, but many Chinese companies have found it difficult to engage in FDI in the US.
In March, China had its first monthly trade deficit in six years. The appreciation of the renminbi would not correct global imbalances. If anything, an excessive concern with the Chinese currency contributes to trade friction that can hurt all and benefit none.
In the past two years, policymakers have helped the world dodge a second Great Depression, but the bill is yet to be paid. At the same time, low interest rates and inventory-driven growth have masked troublesome trends in the advanced economies.
In the past, countries with very high budget deficits were in the developing world. Today, countries with very high deficits amount to more than 40 percent of global GDP. This figure is dominated by advanced economies such as the US and the UK. Since high debt levels tend to slow economic growth, the ratio does not bode well for the future.
In Western Europe, the Greek crisis is not an isolated case, but an inherent part of a vulnerable fabric, which has already led to significant deterioration in Iceland and Ireland, and threatens to include Portugal and Spain.
In the US, the rating agencies are taking a serious look at the doggedly high deficits and the debt-to-GDP ratio, which has increased some 20 percent in less than two years.
In the short term, substantial fiscal consolidation is not considered likely, due to the mid-term elections in November. Prospects of enduring growth are soft. In the first half of the year, the annualized growth rate may be 4-5 percent; in the second half, it may slow to 2 percent.
As a result, rising debt in the US could reach levels that are no longer compatible with a triple-A rating. Since a downgrade would increase borrowing costs, it would further weaken growth prospects.
We are living a period of dangerous complacency and elusive calm. In many advanced economies, the global crisis in the private sector has caused a rapid and huge deterioration in public finances.
With slowing growth in advanced economies coupled with higher growth potential in emerging economies, the worldwide impact is not cyclical, but structural.
When the dust settles after this crisis, many developed economies will look more impoverished, and many developing economies will look more developed.
At the heart of the world economy, the sources of global growth are engaged in a transition of historic significance - from the leading advanced nations to the large emerging economies.
Today, trade threats are the last thing legislators should contemplate in advanced economies. If would be wiser to adopt a longer perspective, and to build bridges rather than barriers - if only to participate in growth that could benefit all.