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Beware Of Hurt Lions
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According to a recent report by the International Monetary Fund and the International Labour Organization, fully 25 per cent of the rise in unemployment since 2007, totalling 30 million people worldwide, has been in the US. If this persists, as I have long warned it might, it will lay the foundations for global trade frictions. The voter anger expressed in the US mid-term elections could prove to be only the tip of the iceberg.
Protectionist trade measures, perhaps in the form of a stiff US tariff on Chinese imports, would be self-destructive, even absent the inevitable retaliatory measures. But make no mistake: the ground for populist economics is becoming more fertile by the day.
The new US Congress is looking for scapegoats for the country's economic quagmire. And, with a president who has openly questioned rigid ideological adherence to free trade, anything is possible, especially in the run-up to the 2012 presidential election. If trade frictions do boil over, policymakers may look back on today's "currency wars" as a minor skirmish.
In light of America's current difficulties, its new proposal for addressing the perennial problem of global imbalances should be seen as a constructive gesture. Rather than harping endlessly on China's currency peg, which is only a small part of the problem, the US has asked for help where it counts: on the bottom line.
True, today's trade imbalances are partly a manifestation of broader long-term economic trends, such as Germany's ageing population, China's weak social safety net and legitimate concerns in West Asia over eventual loss of oil revenues. And, to be sure, it would be difficult for countries to cap their trade surpluses in practice: there are simply too many macroeconomic and measurement uncertainties.
Moreover, it is hard to see how anyone — even the IMF, as the US proposal envisions — could enforce caps on trade surpluses. The Fund has little leverage over the big countries at the heart of the problem.
Still, even if other world leaders conclude that they cannot support numerical targets, they must recognise the pain that the US is suffering in the name of free trade. Somehow, they must find ways to help the US expand its exports. Fortunately, emerging markets have a great deal of scope for action.
A determined effort by emerging markets that have external surpluses to expand imports from the US (and Europe) would do far more to address the global trade imbalances over the long run than changes to their exchange rates or fiscal policies. Emerging markets have simply become too big and too important to be allowed to play by their own set of trade rules.
Germany might rightly argue that it has followed a relatively laissez faire attitude towards trade, and that it should not be punished, despite its chronic surpluses. After all, it has stood by as the euro has soared recently.
Nevertheless, Germany is a huge winner from global free trade, and it is hardly without tools and means to reduce its surpluses — for example, by pressing to de-regulate its highly rigid product markets.
It is remarkable how the US has remained steadfast in its support of free trade. Even in cases where its rhetoric has sent mixed messages, policies have been decidedly liberal.
Consider the long-suffering US-Colombia free-trade negotiations. Although one would never know it from listening to the Congressional debate, the main effect of an agreement would be to lower Colombian barriers on US goods, not vice-versa.
American hegemony over the global economy is perhaps in its final decades. China, India, Brazil and other emerging markets are in ascendancy. Will the transition be smooth and lead to a fairer and more prosperous global economy?
The current rut in which the US finds itself could prove to be a problem for the rest of the world. Unemployment is high, while fiscal and monetary policies have been stretched to their limits. Exports are the best way out, but the US needs help. Else, simmering trade frictions could throw globalisation sharply into reverse. And not for the first time.
The author is Professor of Economics and Public Policy at Harvard University, and was chief economist at the IMF.
Copyright: Project Syndicate, 2010.
(This story was published in Businessworld Issue Dated 15-11-2010)