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Mix-Ansicht- Stephen Roach The Danger Zone of Global Rebalancing - CRASH_GURU, 12.04.2005, 21:32
Stephen Roach The Danger Zone of Global Rebalancing
-->The Danger Zone of Global Rebalancing
Stephen Roach (New York)
11 April 2005
Trade tensions are spilling over into the political arena. That’s the case in Washington and it could well be the case in Europe if Asia continues to resist on the currency front. All along, the biggest risk of global rebalancing is that the onus of adjustment could shift from economic and financial forces to the politics of trade frictions and protectionism. As global imbalances mount, those risks are now rising -- pushing the world into the danger zone of global rebalancing.
The globalization of capital and trade flows is a double-edged sword. In an ideal world, the benefits of cross-border integration are the classic “win-win” of a positive-sum game for the global economy. The diffusion of production and technologies into an increasingly borderless world is a powerful spark for economic development. As high-cost industrial countries establish beachheads in low-cost developing countries, employment and income generation are boosted in emerging economies -- ultimately providing support for a new class of global consumers that offers the potential of new export markets for rich countries. At the same time, industrial countries benefit from newfound efficiencies in the global supply chain; as inflationary pressures are reduced, purchasing power and consumption in the developed world draw a new source of support that then provides further impetus to the globalized production platforms of the developing world.
The ideal world also benefits from the rapidly expanding volume of global capital flows. Over the 1990 to 2003 period, financial assets in the developed world have essentially tripled as a share of GDP, according to IMF research. Such a dramatic expansion of global capital flows serves the highly useful purpose of distributing financial assets and their associated risks to a much broader universe of investors -- thereby providing a more effective cushion for those inevitable financial shocks. In this ideal world, the globalization of trade and capital flows fits like a glove -- giving rise to the ultimate virtuous circle. Who could ask for more?
Unfortunately, that ideal world does not exist. Instead, today’s increasingly integrated global economy is beset by record imbalances. The disparity between current-account deficits (mainly the United States) and surpluses (mainly Asia and, to a lesser extent, Europe) is now approaching a record 4% of world GDP. The global economy is increasingly supported by a unipolar consumption dynamic -- riding on the back of saving-short, wage-constrained, and overly-indebted American consumer. Meanwhile, job growth and unemployment remain under extraordinary pressure in the rich, developed world. And contrary to the hopes and dreams of the ideal world of globalization, there is little sign of the long-awaited spark to domestic demand in the developing world that was supposed to provide new markets for exporters in the developed world. China -- the dynamo of the developing world -- is a case in point: Household consumption fell to a record low of 42% of Chinese GDP in 2004. Moreover, a recent study of the Asian
Development Bank finds that there has been no meaningful shift to domestic-demand-led growth models in the region as a whole over the past decade (see pp 40-62 of Part I of the Asian Development Outlook 2005). Alas, a real-time status-check on globalization speaks more of imbalances and tensions than of the proverbial rising tide that lifts all boats.
And so the politicians have entered the equation. The theory of globalization counsels patience -- that it takes time for the flowers of the virtuous circle to bloom. Yet politicians have no such patience -- or at least they run out of it very quickly. Forever focused on the next election, political leaders have a very different time horizon than that provided by the evolutionary forces that may be reshaping the world, in general, and conditions in their home countries, in particular. Politicians need short-term results to withstand the howls of protest from equally myopic voters. And so they intervene in an effort to temper the impacts of global imbalances on their constituents. This then sows the seeds for trade frictions and protectionism -- always the weakest link in the ideal world of globalization.
Recent actions in Washington are especially disconcerting in that regard. Last week, the US Senate took an important “straw vote” on protectionism, and the China bashers won hands down by a margin of 67-33 (see my 8 April dispatch, “The Drumbeat of Protectionism”). No anti-trade laws were passed. But the Senate leadership, in an effort to avoid an embarrassing snafu in pushing through the Foreign Aid Bill, gave in to sponsors of the China Currency Bill (S. 295) -- a proposal that would impose stiff 27.5% tariffs on all Chinese imports into the US. As a quid pro quo for “detaching” the China tariffs proposal from the foreign aid bill, the bipartisan supporters of the anti-China bill were offered assurances that full-blown hearings and a floor vote would be allowed on this proposal by the end of the summer. In the context of a record US trade deficit, unrelenting pressure on manufacturing employment, and extraordinary compression in real wages, the risk is this debate could take the US body politic v
ery quickly down the slippery slope of trade frictions and protectionism. Never before has the US run a bilateral deficit as large as the $162 billion imbalance with China in 2004 -- sufficient to have accounted for 26% of the total trade gap. Never mind that this trade deficit is a direct outgrowth of a record shortfall of US saving -- brought on, in large part, by Washington’s reckless fiscal profligacy. For US politicians, the scapegoating of China is a classic foil to pander to disaffected voters while, at the same time, avoid the tough choices of deficit reduction. In my view, this legislative tactic could well bring the US-China debate out in the open -- creating a groundswell of support for action.
Europe could well be next to join the protectionist queue. In large part, that’s because it has already borne the brunt of the dollar depreciation that is an outgrowth of America’s gaping current account deficit. Over the past three years, the broad trade-weighted euro has risen over 22% in real terms, taking on the lion’s share of the world’s adjustment to a 15% real drop in the broad trade-weighted dollar. By contrast, Asia hasn’t budged. The broad trade-weighted yen has been essentially unchanged over this same period, and the dollar-pegged Chinese renminbi has declined about 10% since early 2002. To the extent that another downleg in the dollar is coming -- and I very much believe that will be the case in the context of the US current-account adjustment -- the onus of burden sharing needs to shift to Asia. If Asia does not accede, then the math of the dollar’s next move down will put excruciatingly further pressure on Europe -- easily capable of pushing the euro well above 1.50 versus the doll
ar. Lacking in domestic demand support and suffering from chronically high unemployment, I suspect Europe will become increasingly intolerant of bearing yet another disproportionate share of the burden of dollar adjustment -- a burden that would only put further currency-induced pressures on export competitiveness. As such, European politicians could well counter with anti-Asian protectionist ploys of their own -- not just aimed at China but quite possibly at Japan, as well.
History warns that this is precisely the phase in the globalization cycle when protectionism and geopolitical instability have reared their ugly heads in the past. That was the case in three of the most recent episodes of globalization -- the integration of the Atlantic economy in the second half of the 19th century, the global integration in the first decade of the 1900s, and the globalization in the inter-war era of the 1920s. In each of these instances, the initial rush to global convergence was characterized by a sharp expansion of world trade and global capital flows that seemed unstoppable at the time. Unfortunately, there came a point in all of those periods when that convergence was undermined by mounting instabilities -- namely, ever-widening cross-border income inequalities, unstable trade and capital flows, mounting geopolitical tensions, systemic problems in banking systems, and a reaction against international migration (see Kevin H. O’Rourke and Jeffrey G. Williamson, Globalization and Histo
ry, The MIT Press, 1999). Unfortunately, many of those destabilizing characteristics of the past are very much in evidence today. For a world that is currently afflicted by record imbalances, those are hardly precedents to take lightly.
The IMF has come to a similar conclusion. In a pre-released chapter of its 2005 World Economic Outlook, the IMF research staff also warns of the double-edged sword of globalization (see Chapter III, “Globalization and External Imbalances” available on www.imf.org). While the world can draw comfort from the cross-border integration of trade and capital flows for reasons noted above, the IMF stresses the increased vulnerability of a system that is so heavily dependent on favorable investor sentiment toward dollar-denominated assets. Should that sentiment be shaken by any reason -- either a loss in confidence by private portfolio investors or a shift in foreign exchange reserve management practices by foreign central banks -- then all bets would be off. In light of protectionist rumblings in Washington, I worry more about the latter possibility -- a retaliatory reduction of overweight dollar positions by Asian authorities. As the political pendulum swings from trade liberalization toward trade frictions a
nd protectionism, the possibility of a threat to sentiment needs to be taken seriously.
Two extreme scenarios bracket the wide range of global rebalancing alternatives -- the benign outcome, where the adjustments are gently spread over a long period of time, and the disruptive outcome, where the adjustments are concentrated in a relatively short period of time. Everyone favors the benign outcome. Financial markets are priced for that possibility and, not surprisingly, global policy makers express confidence in the painless fix. I fear this confidence is at odds with mounting political risks. By upping the ante on trade frictions and protectionism, politicians are shifting the odds into the danger zone of global rebalancing and the dollar crisis that might trigger. It wouldn’t be the first time a rush to globalization sowed the seeds of its own demise.
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