Euro woes increase risk of trade wars

By J Saft
May 20, 2010

Europe won’t just be exporting deflation to the rest of the world, it will export serious trade tensions as well: first between the United States and China, and, possibly, eventually between Europe and the United States.

The austerity required to get Greece and other weak euro zone nations’ budgets in shape will exert a powerful deflationary force, as many countries which formerly imported more than they exported will be forced to cut back.

As well, the euro has dropped very sharply. Germany’s quixotic campaign against speculators — banning naked short selling against government debt and government credit default swaps — gave the euro its latest shove downward, but the trend has been strong for months. The euro is now about 15 percent below where it started the year against the dollar, making U.S. exports less competitive and adding to pressure on the United States to be the world’s foie gras goose: being force-fed everyone else’s exports while its own unemployment rate remains high.

That Britain is now embarking on its own round of budget cuts will only make matters worse, adding up to one more important actor trying to consume less and export more courtesy of a devaluing currency.

Perhaps the best outcome is rising trade and currency tensions between the United States and China, while at worst this could set the stage for broader conflicts and a round of tit-for-tat tariffs to match similar currency devaluations.

Michael Pettis, a professor at Peking University, explains the issue succinctly on his blog, in which he says:
“Make no mistake, if southern European trade deficits decline, someone somewhere must bear the brunt of the corresponding adjustment. The only question is who?”

The scale of the adjustment is large; taken together Spain, Italy, Portugal and Greece account for about 16 percent of global trade deficits. Add in France, which will surely share some of the pain, and we get up to about 20 percent. You simply cannot have savage recessions and budget cutbacks in these countries without it exerting a powerful force on their trade partners.

Clearly the first fault lines will not be across the Atlantic. Talk of the potential for coordinated intervention to support the euro, or at least to make its fall against the dollar a two-way market, attest to the strength of U.S.-European relationships. This is a group that managed the 2007 and 2008 conflagration without ending up at each others’ throats.

CHINA MAY BALK AT REVALUATION
Pettis points out that within China there is an attitude that the fall in the euro against the dollar, which has made the yuan correspondingly stronger against the euro, is an argument for caution by China in revaluing its currency.

Remember too that the European Union comprises China’s largest export market, so it will suffer a double blow, once now by a rising currency and again going forward as Europe adjusts.

U.S. Treasury Secretary Timothy Geithner is traveling to Beijing next week to press trade and currency issues. Expectations had been that this would lay the groundwork for some measure of a revaluation of the yuan, which is kept artificially low by the Chinese. The euro zone mess seems to have put paid to that immediate hope. Washington and Geithner are unlikely to want to make already fragile international markets even more so by talking tough next week, but, as the U.S. elections in November near, and, if U.S. unemployment fails to fall, the pressure to take action against China in the form of not just verbal battering but actual tariffs may become too much.

I’d note that the U.S. primary elections on Tuesday showed voter anger is focused on incumbents in general and Washington in specific. It would not be a surprise for the administration to try to focus that anger outside the country.

So, rising trade tensions with China, but there is also a meaningful chance that tensions will rise eventually between the United States and Europe. Thus far European efforts to address euro zone issues have been disorganized and riven by internal dissension. Germany did not, it appears, consult its partners about its short selling plan. While the European Central Bank’s excellent relationship with the Federal Reserve will help, there is a real chance that the euro suffers a disorganized meltdown and that Europe cannot agree among itself about how, or whether, to stop it.

That, especially if combined with Chinese intransigence, could prove to be intolerable for the United States.

Trade wars added greatly to the depth and length of the Great Depression. The world’s ability to avoid a similar fight has been one of the blessings of the last two years.

Not everyone can export their way back into the black, at least not everyone at the same time.

How that is resolved as Europe melts into another recession will be one of the key issues of 2010 and 2011.

(Editing by James Dalgleish) (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

18 comments

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Like I tell my kids, if it says, “Made in China” don’t buy it or throw it out if it is cosmetics or food. Buy from your friends, neighbors, and family – Buy American.

Peace.

J

Posted by Jbemory | Report as abusive

Time for the US to make stuff….once again.
The US needs an economic “Marshall Plan” of it’s own.
Bailing out the banks was a crappy first step.

Posted by WeNotMe | Report as abusive

I say it is about time for stability and doing away with deficit spending. Let China buy its own shoddy products.

Posted by fred5407 | Report as abusive

It’s somewhat dispiriting that the two non-spam comments so far seem to think that the trade war that James is warning against would be A Good Thing.

Posted by Ian_Kemmish | Report as abusive

Why is it okay for China to pursue aggressively protectionist trade policy and to manipulate its currency to perpetuate irretrievable trade imbalances, yet it is so terrible for Europe or the US even to protest this, let alone enact protectionist trade measures?

This is the single most consistent message in every article about trade – and I think it stinks. I’m absolutely in favor of an all-out trade war with China. We should cut them off from American Markets ENTIRELY. F’ ‘em all.

Posted by JackMack | Report as abusive

Let China buy its own shoddy crap and let Mexico take care of its own welfare hoard. As one of the 48% of Americans who pay taxes, I’m sick of both of them.

Posted by Toria | Report as abusive

Wait a minute — wasnt the European debt crisis triggered by phony financial products (derivatives, swaps, etc) from the USA?

Posted by JJWest | Report as abusive

The only ones “handling” anything is the fed and big oil. You’ve seen how that’s working out. Will no one stand for truth? Is justice what jesus talked about, when he spoke of eternity?

Posted by richardcavessa | Report as abusive

Frankly, I think we deserve some “protectionist” measures against China’s economic warfare. What’s wrong with protecting ourselves?

All you moron aristocrats who like to kid yourselves that the current global system of *free trade* is free need to wake up. The USA allows anyone and everyone to export to them, whilst our imports pale in comparison. Many countries do not allow American imports.

Once you have walked through the gutted industrial facilities of the rust belt and other former manufacturing centers you will see the true devastation. America is rotting from the inside out our corrupt politicians, as well as the Chinese, are to blame.

Posted by murfster | Report as abusive

I mean our own exports*

Posted by murfster | Report as abusive

What China is doing in world trade comes straigt from the text book……….written by the US. The US would be the biggest loser (in simple trade) of world tarrif war because I think china will be forced to divirsify into say aircraft manfacture.

Hasten slowly and keep in mind that this is all about debt. BIGGER DEBT bigger problem.

Posted by tonydd | Report as abusive

Lol you are extremely stupid. China is already gearing up to compete with Boeing, Airbus and Bombardier. Their aircraft are direct ripoffs of Western models and GUESS WHAT? THEIR CURRENCY MANIPULATION WILL MAKE THEM UNCOMPETITIVELY CHEAP.

I think this whole system works because people in the west are mind numbingly stupid and fail to understand. People like you “tonydd”

Posted by murfster | Report as abusive

Another stimulating article, for which thanks.
I guess Euro and £ devaluation are concomitants of government dictated high wage costs. At some point another valuation has to give, whatever the direct reason (the PIGS’ excessive state consumption).
The economic limitations include the revaluation of non-domestic debt. The political limits are very obvious – the Greek holders of state ‘non-jobs’ are adamant they they are owed a living; the British illusionists equate economic wellbeing with excessive house prices (a.k.a. inflation) and the government and central bank have the explicit policy of inflating away the value of savings.
Eventually the costs are felt.
Ed Martin

Posted by EdMartin | Report as abusive

Adjustments are painful, however globalisation has had a growth that ressembles that of bad weeds, uncontrolled and unregulated. China took advantage of the system which Westerners have laid out in front of them, they grabbed the opportunities which were offred to them, simply because they could do so. This points to a fundamental conclusion, which that the responsibility in establishing proper trade systems, the responsibility in acheiving balance, is ours ENTIRELY. At that the West has failed in the last 2 decades, and its own greed was part of this pernicious equation.

The Chinese are collective beings, and as a collective entity they are far more coordinated than the West is where debate takes place before collective action can be taken. The Chinese are to be feared for the simple reason that they are “moral aliens”, they do not respond to our sensitivities and will not care that the Western way of life is battered to death. They focus on their own benefits, make up appearances for the sake of fooling outsiders, while their true heart is blind to the faith of the civilized world outside China’s borders.

Taking a bit of distance from such a people is nothing but good governance.

Posted by Neander | Report as abusive

Start a trade war it will end in real war !

Posted by Wicki | Report as abusive

Can’t read the whole article…Right from the beginning
it says that German bans have …weakened the Euro more.
On the contrary, the Euro has stabilized and it is actually appreciating against the dollar,the pound and the Swiss frank!

Furthermore, it is surplus “transatlantic” capital that has fueled Chinese exports and it is about time for those guys to stop speculating with their profits and put them in productive investments back home again!

Posted by Donbasilio | Report as abusive

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Posted by linqingshan | Report as abusive

it is a monopoly game played by all the major stakeholders who push global trade to new heights. It’s all about profits – certainly not to ‘save 3rd world countries’ give me a $%@$%$#% break.

Certainly agree with ‘jbemory’. Buy local. That also means boycot mcdonalds, burger king, dennys’, target, walmart, homedepot.
scary isn’t it!Are there any mom-pops left at all?

Posted by polle | Report as abusive