WASHINGTON, Sept. 22 (UPI) -- If not rapidly reversed, the World Trade Organisation talks' collapse at Cancun last Sunday has long term effects far more significant than the short term ones. It could cause immense difficulties for the open, fast growing economies of Asia ("tigers") while greatly alleviating the pressure for reform in the sluggish polities of continental Europe ("weasels.")
The caveat at the beginning of the lead sentence may look wimpy, but it's real. I'm a business correspondent, I don't pretend to understand politics. It appears to me that the failure in Cancun demonstrates that free trade no longer has a sufficient political constituency to move forward, but that is a political question and I could be wrong. If Jacques Chirac comes out next week, and announces he is for unfettered, rapidly increasing international trade, and deep reform of the EU's Common Agricultural Policy, then call me an idiot.
Assuming my political instincts are not entirely in error, however, we appear to be in for a period of increasing protectionism. In the United States, there is a Presidential election next year with a very political President indeed who now looks as though he will have to work rather harder for re-election than he had hoped. Trade representative Robert Zoellick may try to sign limited free trade agreements with a coalition of the willing, but the willing are unlikely (at least before election time) to include any of the major players whose exports pose a threat to U.S. producers. George W. Bush has already showed, by his steel anti-dumping duties and signature of last year's farm subsidy bill, that electoral success is to him a great deal more important than economic principle. While in 2004 it is likely that the dollar will be further declining, with consequent benefit to U.S. exporters, Bush can nevertheless be expected to find some key economic interest in a swing state, and grant it tariff protection. Textile trade, in particular, appears unlikely to be freed up in January 2005, as is currently scheduled under the 1994 Uruguay Round agreement. (Yes, I know January 2005 is after the election, but the textile lobby aren't stupid, they'll catch the administration napping at some moment when poll numbers in North Carolina look dicey, and cement an extension of the current iniquitous quota system.)
In Europe, forces of protectionism are likely to strengthen not weaken over the next year, as the euro, encouraged by Sunday's G7 finance ministers' meeting, strengthens against the dollar making Asian exports even more competitive in the EU market. Whereas the U.S. administration will continue to "jawbone" China, making feeble and misguided comments about the yuan exchange rate (which, if the currency were freed up completely for Chinese capital exports, would initially drop, not rise) the Europeans will be more sensible. They will profess eternal friendship for the Chinese government and people, and impose at the Brussels level endless bureaucratic barriers against Chinese imports into Europe. Since health, safety, environmental and workers' protection standards are all within the competence of the Brussels bureaucracy, they have infinite capacity to do this, without either the Chinese government or the few free traders within the EU being able to do anything about it.
Looking now at Asia, the one bright spot for free traders recently is the re-election as Liberal Democrat Party leader of Japanese prime minister Junichiro Koizumi. As has been pointed out by this column on a number of occasions during his two years in power, Koizumi has made considerable progress in implementing the reforms needed by the Japanese economy, in particular by reining back the wholly uncontrolled infrastructure spending that was threatening to suck Japanese public finances down a black hole. The Japanese banking system, quite wrongly held up by the West as a uniquely inept money pit that could not possibly have parallels anywhere else, is also slowly improving, as renewed economic growth strengthens the major part of the banks' loan portfolios that relates to operating companies and not to decade-ago property speculation.
Japanese exports will be held back by protectionism and the tendency for the yen to appreciate against the dollar, but Koizumi can make himself very popular domestically, and relieve much of the strain on the yen's exchange rate, by opening the Japanese domestic market further to cheap, good quality imported goods from the rest of Asia, in particular in the agricultural sector. He knows it, so look for considerable progress to be made on bilateral trade deals between Japan and such of its neighbors as Thailand and, more interestingly, India.
India is perhaps the most interesting "wild card." Traditionally, the Indian economy has been highly autarkic, with tariffs averaging 35 percent and Indian consumers until recently driving around in a very expensive domestic copy of the 1950s Morris Oxford, fake half-timbered side panels and all (I bet the half-timbering didn't last long during the monsoon season, given India's exciting number and variety of timber-devouring insects!) However, the Indian political economy under prime minister Atal Vajpayee is very different, in particular being heavily oriented towards exports of services to the United States.
Two factors have the capability to derail this trend. First, the U.S. is becoming increasingly alarmed by its loss of low-end service jobs and, at a time of high unemployment, is very likely to turn protectionist in this area. Second, India is due for an election next year; if the Congress party is returned, then in spite of the continued presence in the party leadership of former finance minister Manmohan Singh, who started the liberalization process in 1991, progress may slow or even reverse. Still worse of course, would be a situation in which there was no overall majority, and a government had to be formed that included economically eccentric extreme nationalists or Communists.
Given Bush's electoral needs in 2004, Karl Rove's advice may well trump Vajpayee's pleas and produce some U.S. protectionist measure in services. In that case, for both political and economic reasons, Vajpayee will need to show a new alternative market to which India can direct its exports. Japan, in turn, can reduce the upward pressure on its exchange rate by opening its domestic market to India, while a lowering of bilateral tariffs would increase the supply of Japanese consumer goods to the Indian middle class. The two nations need to talk -- there would appear to be a deal there! With Indian tariffs so high, and Japanese agriculture so protected, the gains from fully opening trade between the two countries may be spectacular indeed.
China's problem is that it is accused by the U.S., with which it has a $100 billion bilateral trade surplus, of dumping its consumer goods exports, but its overall trade surplus is modest, as imports from other parts of Asia, allowed in by China's 2001 accession to the WTO, move its trade picture towards balance. Further, over the past two decades the very high Chinese savings have been funneled via the Chinese banking system to prop up loss-making state enterprises. Returns to Chinese savers are only mildly affected by this; what has really suffered are the balance sheets of the Chinese banks, which are now weighed down by over $600 billion of bad loans, more than 60 percent of Chinese GDP. Domestic savers (at least the sophisticated ones with substantial balances) are very well aware of this, which is why Chinese "foreign investment" has been so strong in the last couple of years -- around 60-70 percent of the vaunted $60 billion per annum of "Foreign Direct Investment" is in fact domestic Chinese money, smuggled out illegally and returned to the country through Hong Kong and now Taiwan.
Since illegal currency smuggling is both expensive and dangerous, you can bet that there is a huge pent up demand among Chinese savers for facilities to invest abroad legally, whether in Wall Street or more likely simply in foreign bank accounts that cannot easily be seized by the Chinese government. Hence the Chinese government cannot afford either to liberalize exchange controls or to up-value the yuan; either would have major adverse consequences on the ramshackle Chinese domestic economy. Moreover, at some stage, the yuppification of Shanghai is going to lead to a burst property bubble, of the type familiar in Hong Kong, most notably in 1973, when its ramifications led to an 80 percent drop in the Hang Seng share index. For the world economy in 2004, China is a problem, not a solution.
The rest of the world can pretty well be ignored when it comes to considering world trade. The Middle East will continue exporting oil -- and almost nothing else. Africa has been banged back into poverty yet again by the failure at Cancun -- but there are so many difficulties, political, climatological and health, facing any African success stories that in reality success at Cancun would probably have made little difference. Latin America will continue on its autarkic way -- with its main problems still caused by the abysmal quality of its governments, and economic advance depending on the continued willingness of either the world's banking system or the IMF/World Bank to go on throwing good money after bad policy.
With the exception of a possible Japan/India deal, therefore, it's all pretty gloomy -- except in one area, the protectionist countries of continental Europe, exemplified by the "weasels" France and Germany, but also including the non-weasel but demographically very challenged Italy. For them, a strong euro means weaker exports, but a rise in world protectionism that gave them a license to raise barriers against foreign penetration of their industries offers a much more important benefit -- it removes the necessity for structural reform of pensions and welfare.
The key problem for all three countries is the graying of their population, and the impossible cost imposed on the workforce by the increasing number of generously compensated retired and unemployed workers. While both France and Germany have undertaken modest reforms this year, as did Italy last year, all three countries are still far from ready to compete in a "level playing field" free market against Asia. Hence a rise in protectionism, raising tariff walls around Europe, reduces the competition for "weasel" industries only to Britain (which they do not fear, particularly under a high-tax Labor government) and Eastern Europe, where they (maybe wrongly) feel they can exert political muscle to prevent serious encroachment.
For these countries, the EU was formed, not simply to eliminate the risk of war in Europe, but to provide a large and wealthy protected market for high-cost European industry, in which "social protections" can be maintained indefinitely. A slowing in globalisation, and a resulting perpetuation of current economic patterns can only be good news to them.
As I said, sell the Asian tigers -- their economies depend crucially on trade, and are badly hurt by any upsurge in protectionism, which in the case of Asian goods in Europe is further fueled by an unattractive strain of European racism that believes that only countries with good wine, short workweeks and long vacations can truly call themselves civilised.
Raise a glass in congratulation to Jacques Chirac. At Cancun, his objectives were achieved -- and almost nobody is blaming France, for once.
And, while all shares are now overvalued in a slow-change, low-growth world, if you must invest, buy the giants of 20th or even 19th century European industry. They will be around for a long time yet!
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
