This is the next danger facing the world’s economies. If China’s economic growth is stifled expectation s for its vast population could be dashed and history has shown that this can lead to the flexing of military muscles. Japan in the 1930s is an example.
G20 will not live up to its hype for they are fascinating to have someone to blame for all the world’s ills when the real people to blame as a class are the politicians who allowed all the errors to be made under their very noses.
Christina
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TELEGRAPH 21.9.09
G20 leaders must keep in mind the dangers of the protection racket
Of all the dangers which could yet cause the current economic recovery to disappoint, perhaps the most serious is the threat of restrictions on imports.
By Roger Bootle
When the leaders of the G20 meet this week in Pittsburgh, this danger should be uppermost in their minds. Averting it will require a focus on the tricky issue of global imbalances, which has plagued the international monetary system for so long.
This issue has apparently slipped down the agenda as attention has been consumed by the rage at banks and bankers, and as the imbalances themselves have narrowed somewhat. America's deficit has fallen in reaction to the recession. Meanwhile, China's surplus has fallen as world trade collapsed and in reaction to her stockpiling of raw materials. But both of these factors are temporary. If the economic recovery continues then the American deficit will widen again – as will the Chinese surplus.
President Obama's decision to slap a 35pc tariff on imports of Chinese tyres could be the harbinger of what is to come. The Chinese have been outraged and have threatened retaliation. But in truth they have only themselves to blame. Last year their surplus amounted to some 10pc of GDP, or $400bn. While Western countries were able to boost domestic demand by easy credit the Chinese could get away with this policy. But those days are over.
As regards what might happen next, the historical omens are not encouraging. For all the championing of it in orthodox economics textbooks, in practice free trade has been more honoured in the breach than the observance. In the later part of the 19th century, although the British Empire followed a policy of free trade, this was far from being the uniform practice elsewhere. Interestingly, America did not share belief in free trade and her economy developed behind tariff walls which restricted foreign imports. In the 1930s, following the American lead, trade restrictions were imposed everywhere – even by the UK, which followed a policy of Empire preference. In the chaos of the 1930s, world trade imploded and there was a sharp fall in living standards.
Throughout the post–war period, policymakers have moved progressively to lower tariff and other trade barriers, with considerable success. The result has been an explosion of international trade. This has been one of the leading reasons behind the extraordinary increase in living standards over the period.
Accordingly, it has been relatively easy for political leaders to resist protectionist pressures. And the argument against protection is still strong – with one caveat. For virtually the whole of the post–war period the aggregate demand argument for protection has seemed otiose. Of course, any one country could generate increased demand for its output by restricting the access of foreign producers to its markets.
But why should it want to? If aggregate demand needed to be stimulated, this could easily be accomplished through the operation of normal monetary and fiscal policy. So trying to achieve a boost to aggregate demand by protectionist measures looked stupid.
But now things are different. The normal mechanisms of boosting demand are already at full throttle. Interest rates cannot effectively be reduced any further. Fiscal deficits are already at levels which strain credibility. In many countries they will soon have to be reduced. The only policy instrument left in the armoury is quantitative easing. The authorities both here [only provided lenders still have confidence in the British economy -cs] and in America may yet find themselves obliged to do even more of this. But, as experience has proved, this is far from being the answer to a maiden's prayer. When confidence is lacking, the central bank can buy assets until it is blue in the face without doing much to stimulate spending.
So the protectionist option begins to look enticing as a way of boosting demand and employment. If a country artificially reduces its imports this would, of course, lead to all the usual losses of income and welfare from the impaired allocation of resources, reduced specialisation and inhibited competition. But in today's circumstances, there is a major offset, namely the boost to GDP from increased aggregate demand – a boost which cannot readily be achieved by normal means. At a stroke, for any individual country considering such a policy, the adverse effects of the recession could be reversed. Suddenly, protection begins to look attractive and the behaviour of the 1930s begins to be understandable.
But if some countries enjoy increased demand through placing restrictions on trade, then some others must suffer losses. They may well retaliate. If they do, then this risks returning everyone to square one as far as aggregate demand is concerned. And this may lead to more restrictions, and more retaliation – and so on and so forth.
Who is most at risk from such a collapse of world trade? It is the surplus countries. The most exposed is China. If her underlying surplus were to be eliminated as a result of Western trade sanctions, then Chinese GDP would be 10pc lower, enough to wipe out one year's growth of the economy. More than that, without access to Western markets, China's potential growth rate would be much lower.
All along China has been playing a very risky game. Even if it was true that using a huge trade surplus was in China's interest in the old days, which I dispute, it certainly isn't now. The West simply will not stand for it any more. If the world is to avoid a serious outbreak of protectionism then the Chinese authorities have got to stop paying lip service only to the objective of rebalancing the Chinese economy. They have taken some action to boost demand but they need to go further – in their own interest. This also applies to the group of smaller Asian countries which are also running large surpluses. If China and the other large Asian surplus countries do not do this then whatever green shoots of recovery are observable now will soon be trampled in the stampede to impose trade restrictions.
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Roger Bootle is managing director of Capital Economics and economic adviser to Deloitte. His new book, The Trouble with Markets, will be published next month by Nicholas Brealey.
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