GLOBAL ECONOMIC TRADE WAR!

[Cain]

http://www.guardian.co.uk/business/2010/oct/04/economic-failure-could-lead-to-protectionism

In all the comparisons between the Great Recession of the past three years and the Great Depression of the 1930s, one comforting thought for policymakers has been that there has been no return to tit-for-tat protectionism, which saw one country after another use high tariffs in an attempt to cut the dole queues.

Yet the commitment of governments to keep markets open was based on the belief that recovery would be swift and sustained. If, as many now suspect, the global economy is stuck in a low-growth, high-unemployment rut, the pressures for protectionism will grow.

The former chancellor, Ken Clarke, aptly summed up the downbeat mood when he said in yesterday's Observer that it was hard to be "sunnily optimistic" about the west's economic prospects. Adam Posen, a member of the Bank of England's monetary policy committee, made a similar point last week in a speech last week advocating more quantitative easing.

Despite a colossal stimulus, the recovery has been short-lived and, by historic standards, feeble. The traditional tools – cutting interest rates and spending more public money – were not enough, so have had to be supplemented by the creation of electronic money. In both the US and the UK, policymakers are actively canvassing the idea that more QE will be required, even though they well understand its drawbacks and limitations.

There is the sense of finance ministries and central banks running out of options. They can't cut interest rates any further; there is strong resistance from both markets and voters to further fiscal stimulus, and so far QE has had a more discernible effect on asset prices than it has on the real economy. The reason for that is that the money created by allowing commercial banks to sell bonds has tended to be used for speculative purposes rather than lent to businesses and individuals.

So what's left? The answer is that countries can try to give themselves an edge by manipulating their currencies, or they can go the whole hog and put up trade barriers. It is a sign of the etiolated nature of the recovery that both options are currently "in play".

Guido Mantega, Brazil's finance minister, warned that an "international currency war" has broken out following the recent moves by Japan, South Korea and Taiwan to intervene directly in the foreign exchange markets. China has long been criticised by other nations, the US in particular, for building up massive trade surpluses by holding down the level of its currency, the renminbi.

It is not difficult to see why individual nations are pursuing this strategy. The lesson from the 1930s is that those countries that devalue their currencies early steal a march on their rivals. So Britain, the first nation to come off the gold standard in September 1931, recovered more quickly than France, which stuck it out to the bitter end.

A second lesson, of course, is that for the global economy as a whole, competitive devaluations represent a zero-sum game, since for every currency that depreciates there has to be a currency that appreciates. As things stand, the currencies that are under most upward pressure are the Japanese yen and the euro. Why? Because the Chinese have all but pegged the renminbi to a US dollar that has been weakened by the prospect of more QE over the coming months.

But currency intervention is one thing, full-on protectionism another. The existence of the World Trade Organisation (WTO), with its strict rules for what is permissible and sanctions for countries that transgress, has made it more difficult to indiscriminately slap tariffs on imports. What's more, there is still a strong attachment to the concept of free trade; it is the one piece of the so-called Washington consensus that has survived the crisis.

Policymakers still recoil in horror at mention of the Smoot-Hawley tariff, introduced in the US in 1930 and blamed for turning the Wall Street Crash into the Great Depression. Paul Krugman has shown that the collapse in US production could not have been caused by protectionism, but the myth that the slump was caused by a trade war is an enduring one.

The most that could be said is that beggar-my-neighbour policies eventually added to the problems caused by ill-conceived monetary and fiscal policies: the failure to cut interest rates quickly enough, the failure to keep credit flowing, the failure in the US to keep banks in business and the insistence on running balanced budgets.

In Britain, protectionism in the form of "imperial preference" – for goods from within what we would now know as the commonwealth – was one of the three factors that helped the economy recover after 1931: devaluation and cheap money were the other two.

The question now is whether the commitment to free trade is as deep as it seems. The round of trade liberalisation talks started in Doha almost nine years ago remain in deep freeze. Repeated attempts to conclude the talks have run into the same problem: trade ministers talk like free traders but they act like mercantilists, seeking to extract the maximum amount of concessions for their exporters while giving away as little as possible in terms of access to their own domestic markets.

The approach taken by countries at the WTO talks also governs their thinking when it comes to steering their countries out of trouble. There are plenty of nations extolling the virtues of export-led growth, but very few who are keen on boosting their domestic demand so that those exports can find willing buyers. The global imbalances between those countries running trade surpluses and those running trade deficits are almost as pronounced as they were before the crisis, and are getting wider. This is a recipe for tension, especially between Beijing and Washington.

This tension manifested itself last week when the House of Representatives passed a bill that would allow US companies to apply for duties to be put on imports from countries where the government actively weakened the currency – ie China.

The Senate will debate its version of the same bill after the November mid-term elections, but it was interesting that the House bill was passed by a big majority and with considerable bipartisan support. China responded swiftly and testily to the developments on Capitol Hill, arguing that the move would contravene WTO rules and quite deliberately tweaking its currency lower.

It's not hard to see why Beijing got the hump. It introduced the biggest fiscal stimulus (in relation to GDP) of any country and helped lift the global economy out of its trough. It can only fulfil its domestic policy goal of alleviating poverty if it can shift large numbers of people out of the fields and into the factories, and that requires a cheap currency. It has been financing the US twin deficits. Unsurprisingly, then, its message to the Americans was clear: it's not smart to get on the wrong side of your bank manager, so don't mess with us.

What happens next depends to a great extent on whether the global economy can make it through the current soft patch. There are plenty of analysts who believe that policy is working – and that what we are seeing now is but a small blip. But imagine that the next three months see the traditional policy tools becoming increasingly ineffective, that the slowdown intensifies and broadens, and that the Democrats get a pasting in the mid-term elections. In those circumstances, a trade war would be entirely feasible.

This has been on the cards for a while, and tit-for-tat reactions by the US Treasury and CCP are the engine currently driving the possibility of a trade war occuring.

[The Johnny]

If a trade war occurs, who wins? By my -unknowing of economic matters- logic, it would be a third party, not the USA nor China, perhaps the UK?

[Cain]

If things get out of hand, arms dealers.

If everyone isn't locked into a system whereby they benefit more from not going to war than by going to war, then that system predisposes them towards conflict, reversing the trends (at least amongst the major players) of the last thirty plus years.  It doesn't make war a necessary conclusion, but tilts the scales in that direction.

Aside from that, it's hard to say.  Things like this tend to spiral out of control pretty quickly...everyone has their pet greivances when it comes to free trade, but because, by and large, the benefits are shared amongst everyone, they keep their mouths shut and don't act on them.  Once big players start defecting, everyone else will follow, trying to min-max their economic policies to benefit themselves as much as possible while screwing everyone else.

[Disco Pickle]

All China would have to do is dump their Treasury bonds. 

We'd be fucked economically, and there's no way we'd ever win a land war against them.

that may be simplifying things, as I'm sure we have some strategies thought out on how to counter such an event, but the pain in the short term would be devastating.

[Cain]

China would rather get paid, I suspect.  While they have a few incredibly good ideas concerning how to cripple the USA should a war have to be fought (Google "Assassin's Mace" for more) their overall grand strategy involves avoiding conflicts and getting paid until they can build up the best military possible, letting the warring factions bleed each other out, then marching in, saving the day, and establishing the new global consensus with them at the centre.

Or, failing that, buying up everyone's debt to the point no-one would even want to raise a hand against them, while providing other nations citizens with cheap consumer goods, and their economic elites with healthy profits.

I very much doubt a US-Chinese trade war would devolve into a shooting war, unfortunately it isn't that simple.  It's the unintended side effects I worry about, protectionism leading to autarky leading to the increased use of military force in international disputes because, quite frankly, there is no payoff in settling things peacefully.  That is my concern.

[Adios]

Wars also keep people employed. A lot of people.

[eighteen buddha strike]

In other words Conventional Warfare™ is a cats-paw for industry, or to simplify it further, Military-Industrial Complex.

[Doktor Howl]

and there's no way we'd ever win a land war against them.

Yeah, that's why we lost Korea. 

[Adios]

and there's no way we'd ever win a land war against them.

Yeah, that's why we lost Korea. 

We fought against Soviet provided weapons and air support, against both the North Koreans and the Chinese.

[Disco Pickle]

and there's no way we'd ever win a land war against them.

Yeah, that's why we lost Korea. 

is that a pwny?  

The Pickle is unfamiliar with the proper use of this emote.

[Adios]

DP, here's a good read for you.

http://en.wikipedia.org/wiki/Battle_of_Pork_Chop_Hill

[Doktor Howl]

and there's no way we'd ever win a land war against them.

Yeah, that's why we lost Korea. 

is that a pwny?  

The Pickle is unfamiliar with the proper use of this emote.

It signifies massive self-ownage.  In this case, on your part.

[Disco Pickle]

and there's no way we'd ever win a land war against them.

Yeah, that's why we lost Korea. 

is that a pwny?  

The Pickle is unfamiliar with the proper use of this emote.

It signifies massive self-ownage.  In this case, on your part.

*looks at the war that followed it and the current state of relations in the country*

our definitions of win differ.

good link Charley, thnx.  I've done more down and dirty research on Vietnam than The Korean War, as far as battles goes. 

Grandfather was in Vietnam, but not Korea, so it isn't as personal a war for me.  I'll get to it all eventually though.

[Adios]

The Battle of Pork Chop Hill was a dick measuring contest of epic stupidity.

[Doktor Howl]

our definitions of win differ.

Oh, for fuck's sake.

Dok,
Will be ignoring your drivel in the future.