2013 The Year of the Trade Wars
2013 has been Flagged as the Year of Global Rebalancing
Going for Growth in 2013
Global deleveraging and fiscal austerity, since the Crash of 2008, have so far failed to create the conditions for sustained global economic recovery. Fiscal austerity involves a policy mix, of rising taxes and reduced expenditure, that creates a climate of economic uncertainty in which the private sector refuses to take up the burden of economic stimulus; and the consumer retrenches. In extreme circumstances, this policy mix creates an economy in which tax revenues continually fall, even as fiscal austerity is tightened. Central Banks are then forced to take up the burden of economic stimulus, through the process of Quantitative Easing. Quantitative Easing however only monetizes the government debts and liquefies the banking system, it does not create jobs. If the public and private sectors continue to contract and the consumer continues to deleverage, then Quantitative Easing does not work. Quantitative Easing has avoided a total financial collapse, but it has not guaranteed or stimulated growth.There were signs, in the the fourth quarter of 2012, that policy makers' attitudes were changing.
The IMF, previously a bastion of fiscal austerity, did a total U-Turn; and came close to apologising for the error of its ways in a new working paper entitled Growth Forecast Errors and Fiscal Multipliers.
Friction and Trade Wars
Having concurred that growth is now the priority over fiscal austerity, global policy makers must coordinate their pro-growth activities; so that they do not undermine and conflict with each other. America and Europe both agree that growth should be achieved by the re-balancing of the global economy; so that the deficit countries in the Developed World can export their way to growth via the Developing World. This strategy is epitomized by what has become known as America's "Pivot" towards Asia.
This strategy appears to vitiate against the economic model of the Developing World, which relies upon growth through the support of its export sectors with subsidised energy and undervalued exchange rates; and the protection of its domestic industries via restrictions on imports.
What the Developed World is suggesting is an economic shock to the Developing World. It is hard to imagine that the Developing World is in a position to suddenly apply this shock therapy without serious negative economic, social and political consequences. India for example, has shown a strong aversion to the application of such shock therapy in the opening up of its domestic economy to foreign access. It is therefore very logical to assume that there will be resistance and friction in the Developing World that will spill over into Trade Wars.
The opening skirmishes in the 2013 Trade Wars began in late 2012.
Economic data from America conclusively show that its recovery is unbalanced. The service sector is doing the heavy lifting and manufacturing remains in decline. The powerful Peterson Institute think tank began 2013 by opining that predatory foreign currency regimes have cost the American economy five million jobs. Like Japan, American Manufacturing endured two "Lost Decades"; corresponding with a sideways move in its major equity indices, which many described as a bear market. During this period, the financial sector mushroomed and created employment in bubble industries, as the Fed attempted to address the growth problem with limited monetary policy tools. The failings of this over-reliance on cheap liquidity can be seen in the resultant Tech and Housing Bubbles and their demise. The most recent Credit Crunch has caused a re-evaluation of American economic policy; and the conclusion that a sustainable economy is one with a strong manufacturing base. Clearly, America intends to fight for its manufacturing industry in the global marketplace, going forward. The creation of American competitive advantage by the exploitation of Shale Oil and Gas, can also be clearly seen as an essential element of this industrial strategy.
Japan has perhaps been the most aggressive Developed Nation to adopt a pro-active export policy. Having spent the last two "Lost Decades" watching, whilst Emerging Economies with undervalued currencies and restrictive trade practices have eaten its traditional export markets, the loss of European exports prompted Japan to embark on a strategy to devalue the Yen. This aggressive action by Japan has been deliberately unapologetic; and will ignite trade tensions and reciprocal actions.
One can foresee a scenario, in 2013, in which an America frustrated by resistance to its industrial strategy adopts the Japanese strategy of devaluation; setting off a race to the bottom in the currency markets.
Countries threatened by the new Developed Economy offensive have been swift to counter attack.
South Korea has barred foreign shipping companies from access to its energy sector.
Brazil has placed a tariff system on foreign auto-makers.
Switzerland currently has a Currency War with the United Kingdom, as both countries central banks fight to weaken their currencies against each other.
The few examples given above illustrate that the Trade Wars of 2013 will be numerous and diverse, rather than purely Developed versus Developing; as each nation fights to support its domestic industrial base.