The return of creeping protectionism will hurt everyone
The truce is over. Dim hopes that the world’s largest economies, amid renewed financial tremors, would once again call for international unity and coordination are rapidly fading. In parliaments of the emerging and developed worlds alike, politicians no longer respond to market pressures by vowing pacifism - they prepare their nations for war.
Tensions were already palpable a few months ago. At the time, clashes mainly erupted on the monetary front: the West lashed out at the BRICs for holding down their exchange rate to subsidize their export sectors; the BRICs saw lax monetary policies in the West as a driver behind their own - unwanted - currency appreciation. Each side blamed disappointing trade performance on ‘exchange rates manipulations’.
Despite such polarized positions, however, the so-called ‘currency war’ remained largely a cold one. There was more to find in the rhetoric of vote-seeking leaders than in their actual policies; and over the summer tensions over exchange rates gradually faded, notably because stronger currencies emerged as a possible ally against the BRIC’s greater evil - inflation.
But the Eurozone crisis and a gloomy outlook elsewhere is fanning these unextinguished flames. Safe haven capital inflows have strengthened the dollar, unemployment is stubbornly high, and the spectre of double-dip recession is showing its face - the grounds are laid out for another bout of currency war.
And it’s not just talk this time. The US is preparing a legislation to punish China for ‘currency manipulation’, whereby anti-subsidy export tariffs would be imposed when a currency is deemed ‘under-valued’. The emerging world is also gearing up its legal arsenal: Brazil decreed a 30 per cent tax increase on foreign automobiles a couple of weeks ago, among other measures. It now wants the World Trade Organization to allow ‘exchange rate anti-dumping measures’, which would allow countries to retaliate against exporters deemed using undervalued currencies.
The US bill, due to be voted in the Senate next week, is likely to go ahead. With elections next year and severe constraints on macroeconomic policy, a bit of China bashing is easy credit for both Republican and Democrats. Brazil’s WTO proposal, on the other hand, stands little chance. But the country will probably feint disappointment and draw up its own ‘anti-exchange-rate dumping’ legislation regardless. Currency spats could then escalate into full-blown trade war: there is no simple methodology to establish that a currency is ‘undervalued’, and states may end up skewing their analysis to better fit the will of domestic lobbies and bellicose constituencies.
This would have devastating consequences. Spooked by the memories of the 30s, the G20 has so far resisted the sirens of protectionism; this has probably saved global trade from stalling to a complete halt. But world leaders are now looking inwards, and ignoring their own remarkable - if unrecognized - achievement. They should think again.