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The US has championed free trade "“ at grave cost to itself. To avoid a trade war, other countries must now share the burden
G20 leaders who scoff at the United States' proposal for numerical trade-balance limits should know that they are playing with fire. The US is not making a demand as much as it is issuing a plea for help.
According to a recent joint report by the International Monetary Fund and the International Labor Organisation, fully 25% of the rise in unemployment since 2007, totalling 30 million people worldwide, has occurred in the US. If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions. The voter anger expressed in the US midterm 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 profoundly 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 sometimes openly questioned rigid ideological adherence to free trade, anything is possible, especially in the runup 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 a much larger battle.
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 aging population, China's weak social safety net, and legitimate concerns in the Middle East over eventual loss of oil revenues. And, to be sure, it would very 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 IMF has little leverage over the big countries that are 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.
India, Brazil and China, for example, continue to exploit World Trade Organisation rules that allow long phase-in periods for fully opening up their domestic markets to developed-country imports, even as their own exporters enjoy full access to rich-country markets. Lacklustre enforcement of intellectual property rights exacerbates the problem considerably, hampering US exports of software and entertainment.
A determined effort by emerging-market countries 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. Their leaders must do more to tackle entrenched domestic interests and encourage foreign competition.
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 deregulate its highly rigid product markets.
Given all its recent economic challenges, it is remarkable how, so far, the US has remained steadfast in its support of free trade. Even in cases where its rhetoric has sent mixed messages, US 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. Colombian goods already enjoy virtual free entry to the US market, while Colombian consumers would benefit enormously if their country were to reciprocate by opening its markets to US goods and services. This has not happened "“ one of countless examples of obstacles faced by US companies around the world. All should be eliminated.
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 will go smoothly and lead to a global economy that is both fairer and more prosperous?
However much we may hope for this, the current rut in which the US finds itself could prove to be a problem for the rest of the world. Unemployment in the US is high, while fiscal and monetary policies have been stretched to their limits. Exports are the best way out, but the US needs help. Otherwise, simmering trade frictions could suddenly throw globalisation sharply into reverse. It wouldn't be the first time.
Copyright: Project Syndicate, 2010A podcast of this commentary can be downloaded here
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7 November 2010 3:15PM
"The US has championed free trade "“ at grave cost to itself."
I didn't see the second part of the strap line explained very well!
'At grave cost to itself' - you must be joking.
7 November 2010 3:18PM
He's absolutely correct.
Good luck (for all our sakes) getting disturbingly chauvinist, neo-merchantilist nations to agree to it though.
7 November 2010 3:18PM
The USA brought it on itself by being too self interested. The greed which brought the country and most of the world to a financial crisis was born in the USA.
7 November 2010 3:20PM
'At grave cost to itself' - you must be joking.
At disproportionate cost to itself would be perfectly fair.
7 November 2010 3:25PM
The US has championed free trade "“ at grave cost to itself. To avoid a trade war, other countries must now share the burden
Trans: We've plundered the third world to our benefit, now we're in deep financial trouble we need them to bail us out.
Question is, what is America prepared to give in exchange?
7 November 2010 3:28PM
The USA may need help but it will get precious little unless it starts treating other nations as equells and stops these pointless wars.
It could start by closing down Gitmo, then it could stop its bullying tactics and withdraw its millions of military from most of the world.
7 November 2010 3:31PM
globalisation and the eu are just an excuse to send British jobs abroad.
then again the labour party made British workers too expensive to hire , by increasing the EMPLOYERS NI CONTRIBUTION, (which most socialists dont know about)
7 November 2010 3:32PM
America has already given the world enough.
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