Global Economy Locked in Schizophrenic Tug-of-War

The global economy is locked in an unprecedented tug of war of ideologies, between those commited to propping up the failed free trade model and those who recognize the role of the global trade imbalance in collapsing the economy.  The following linked article is a perfect example of the former contingent.

http://www.reuters.com/article/topNews/idUSTRE52U1YY20090331

The World Bank, led by Robert Zoellick, has announced a paltry $50 billion program aimed at restoring global trade.  Such a feeble attempt is laughable but not surprising, given that Zeollick, America’s Trade Representative from 2001 to 2005, was completely ineffective  and presided over the worst run-up of the U.S. trade deficit in history. 

But the following is an example of new thinking that is emerging.  It seems that the International Monetary Fund sees global trade transitioning to a reduced level and, in some cases, vanishing altogether.

http://www.reuters.com/article/ousiv/idUSTRE52T2D420090330

Marek Belka, director of the IMF’s European department, said … some export-dependent countries would need to find other sources of business when the dust settled.

“What we are seeing now is the sheer implosion of international trade. I think it’s transitory.

Belka said that if the downturn caused U.S. consumers to save more of their money, and buy fewer goods from abroad, exporters around the world would feel the pinch.

“There will be less trade between the United States and China, … there will be less trade everywhere,” Belka said.

“We have to be prepared in our trade policies to look inside and in our immediate neighborhood,” he told the U.N. Economic Commission for Europe meeting.

“I think that domestic economy and intra-regional integration will play a larger role than before. We should not count on global trade to such an extent as we are counting now.”

I believe it’s this new thinking that Obama is counting on to help the U.S. restore a balance of trade.  But I also believe it’s naive to expect it to work.  You can be sure that if customers walk into a Toyota, Hyundai or Mercedes dealership tomorrow or next year, they’ll be just as eager as ever to sell that customer a new car.  Walmart will be just as eager to maximize profits by offering cheap products from China.  Drug companies will be just as eager to maximize profits by taking advantage of tax breaks in Ireland.  Nothing is going to change by itself.  If that’s what Obama thinks will happen, he’ll be sorely disappointed.

At the same time, there’s a schizophrenic approach to the dollar.  Foreign holders are worried about their dollar-denominated investments, like treasuries, but can’t unload them out of fear of driving down the dollar, eroding their export market.  The administration would like a weak dollar to help restore a balance of trade, but fears the resulting rise in oil prices and the prospect of rampant inflation. 

The outcome of this tug of war is clear – the U.S. will move toward a balance of trade.  Whether it happens sooner or later, or whether it’s done through some kind of global cooperation or through the imposition of tariffs or other protectionist measures by the U.S. remains to be seen.  Regardless of whether or not economists and world leaders ever come to understand the root cause of the imbalance in global trade that collapsed the economy, most now understand that such an imbalance can’t be tolerated forever.

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One Response to Global Economy Locked in Schizophrenic Tug-of-War

  1. […] Global Economy Locked in Schizophrenic Tug-of-War « “Five Short … […]

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