Is 70% of the world economy in a liquidity trap?
Paul Krugman expands on the nature of the liquidity trap and why more of the world economy might be in this situation than is commonly supposed. His opening paragraph raises an interesting question for A2 economists - does a liquidity trap encourage protectionist policies and heighten the risks of a period of prolonged de-globalisation?
“Being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense.”
Wen turns the tables
Following on from last month’s article in EconoMAX that I wrote, China has insisted again today that the yuan is not undervalued - The Chinese premier turned the tables on the U.S and Europe today when it said that putting pressure on China to appreciate its currency was tantamount to protectionism!! Genius!
“What I don’t understand is depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism,” Mr Wen said.
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Trade as a stimulus for recovery
Pascal Lamy from the WTO has given a strong defence of the impact that trade can has as a stimulus for broader global economic recovery. World trade in goods and services has declined by 12% since the onset of the financial crisis but according to the WTO although there has been renewed claims of a return to protectionism, fears of a tsunami of import controls have - by and large - proved to be wide of the mark.
read more...»Fly in the ointment for export-led growth
David Smith’s weekly Economic Outlook in the Sunday Times focuses on the prospect that recovery from the recession will come from exports. He suggests that the conditions needed are in place – sterling is a significantly more competitive currency than was the case 18 months ago, there is strong recovery in world trade which is likely to last into 2011, and there is no wage inflation to spoil the competitiveness of UK export prices. The Ernst and Young Item club’s predictions for the economy over the next ten years, to be published today but much trailed through the media this weekend, will suggest that although the domestic economy will struggle to produce enough consumer demand to stimulate growth - debt-laden consumers have to recover from the shock of repaying some of their borrowing before they are prepared to spend so heavily again – growth in exports will be strong, with figures of 9%, 9.5% and 8% growth predicted for 2011 to 2014. If consumption is indeed sluggish at the same time, we can hope that imports will not be growing as fast, so that the figure for net exports improves, allowing Aggregate Demand to grow and some recovery of output to become established.
read more...»Assorted Links (9 Jan)
1/ The Times - Top Ten Credit Crunch Films - Kevin Maher chooses his selection of recession related films
2/ The Times - Prices of new cars will be open to offers - deep discounts in the prices of new cars are expected as the car scrappage scheme draws to a close.
3/ Independent - Virgin gets clearance for launch into banking - a good example here of one of the barriers to entry in the banking industry. Virgin needed a banking licence to break into the retail banking sector - it now has one
4/ Telegraph - The shortlist for worst takeover of the century - a super piece looking at some of the disastrous mergers and takeovers of recent years - some great examples to use in evaluation for essays on business integration/growth
5/ Vox - The impact of crisis-driven protectionism on EU exports: The “Russian doll” effect - useful background on the rise of protectionism in the global economy and the impact this has had on the EU economy
A short guide to protectionism
Available here from the Telegraph
1 Smoot-Hawley
2 Common Agricultural Policy
3 Shoe wars, bra wars
4 Chinese tyres
5 India vs China
Protectionism and the free-market Economist
The Economist magazine is furious with Barack Obama for his announcement of a 35% import tax on tyres from China. The writer looks at the role of world trade in the extraordinary burst of growth that globalisation has triggered, which has “lifted hundreds of millions out of poverty over the past few decades and brought lower prices to consumers everywhere.” The effect is being threatened now though, as world trade is predicted to fall by 10% in 2009 and many countries attempt to help their domestic industries with subsidies or new tariffs on imports: the Economist quotes a report from the Geneva-based World Trade Alliance claiming that, on average, once every three days a G20 member has broken the no-protectionism pledge they made at the summit in April. Specifically, they look at the potential problems to be caused by the new import tax on Chinese tyres: either consumers will have to pay more for tyres made more expensively in the domestic economy, which will cause the motor trade to suffer, or buyers will simply switch to an alternative source of low cost imports, from India or Malaysia, in which case the US jobs will be lost anyway, and in either case there is the risk of provoking retailatory measures from China.
Does one small measure of protectionism matter? The selective steel tariffs introduced by George Bush on imports from China in 2002 had very little effect on trading relations between the two nations in the long-run. The Economist thinks that this is different, and that America has to take a leading role in resisting the temptation to protect, but also largely because they are reliant on the Chinese as major buyers of the government bonds that are financing America’s massive fiscal deficit.
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Obama treads a difficult path with Chinese tyre tariffs
One aspect of the global trade recession in 2008-09 has been the resurgence of protectionist tendencies as countries have lined up to introduce fresh barriers to trade in goods and services. The pressures for import protectionism in the form of tariffs, quotas and other barriers is largely driven by politics and there is a new example to dissect with the news that the US government is to raise the import tariff on low-grade Chinese tyres following a petition filed by the United Steelworkers trade union, which represents workers at many US tyre factories. Chinese exporters will be subject to 35% import tariffs (taking effect on September 26th) which will decline to 30% in the second year and 25% in the third.
Recession prompts a return to protectionism
Here is an important article by Phil Thornton from Clarity Economics which flags up attempts by a group of trade economists to monitor the growing scale of explicit and hidden forms of protectionism in global trade. International trade in goods and services is forecast to contract by nearly ten per cent in 2009 and across the world, countries are either considering or have already introduced a raft of distortionary import controls. Protectionism is spreading from the purely economic (i.e. changes in import duties, subsidies and quotas) to the financial (linking financial bail outs to national economic objectives) and also affecting the labour market (e.g. changes to immigration policies / points systems) - the rise of ‘new protectionism’ threatens to cause further de-globalisation and increase the risks of beggar-thy-neighbour retaliation that could stall a trade-based recovery.
“Global Trade Alert (GTA), which was launched in June, had identified 67 discriminatory measures by July 8, of which 47 had been implemented with 20 waiting in the wings. Discriminatory measures include rises in tariffs that importers must pay or bans on products. Examples include a ban by Saudi Arabia on imports of cars older than five years and a 39 per cent increase in tariffs on Russian oil exports to Belarus.”
EU single market creaks under the pressure of the recession
Wolfgang Munchau has an important comment article on the fragility of the EU single market in todays Financial Times.
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