China, and the slowdown showdown

December 16, 2008

America caught a cold and now China has one too. 

IMF chief Dominique Strauss-Kahn said on Monday that the Fund could cut its forecast for China’s economic growth in 2009 to around  5 percent. To think that only last year China was galloping at a double-digit clip. It’s staggering, and it’s worrying.

Worrying, for one thing, because  – as the Heritage Foundation’s Derek Scissors puts it – “the American economic slump is running into the Chinese economic slump, creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world’s most important bilateral economic relationship”. 

He argues that the new U.S. administration, confronted with a record-breaking bilateral deficit and soaring unemployment, could impose prohibitive tariffs or erect other barriers to Chinese goods. The EU, Japan and others would then be permitted by WTO rules to raise barriers against a diversion of Chinese goods to protect their markets, and “some form of Chinese retaliation is certain”.

“If intemperate, such retaliation will prompt further action by the U.S. and perhaps other countries, threatening the global nature of the trading system,” Scissors concludes.

Michael Pettis, a professor of finance at Peking University, blogged on the same theme last month, warning that Smoot Hawley, the notorious U.S. tariff act that contributed to the Great Depression of the 1930s, could return in a different guise.

Pettis says that while everyone is watching to see if Washington re-enacts new versions of Smoot-Hawley, the real threat may come from current-account-surplus countries which seek to support their export sectors.  There are indeed signs that China is looking to export its way back to vigorous growth through subsidies, raising import tariffs and perhaps currency depreciation (see the grumbling from France’s Anne-Marie Idrac only yesterday on the yuan). 

The bitter lesson from the 1930s is that not all countries can export their way back to economic health at the same time. And if they try, there will be a fight.

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Hopefully, the United States will approach this world wide global economic situation a whole lot better than it did at the last World Trade Conventions when the US Trade Reps stuck their noses up in the air, walked away from the event and shut it down. What a totally disgusting approach. Sad. Pathetic. You wonder why things are not going well. And just where has the Federal Reserve been? The Federal Resrve is open for approximately 6 hours a day – 5 days a week. Do you have any idea the huge volumn of business from around the world that is turned away. For instance, China has to conduct its business with the US Federal Reserve at midnight their time. Wake up US muk muks. The US Federal Reserve should conduct business 24/7 with three1 hour breaks a day to balance their activity and perform auditing functions. Sad. Really pathetically sad.

Posted by Mike C | Report as abusive