From Cannes to Honolulu: Still the same story

November seems to be the month for posh resort-hopping by the world’s Presidential class. Having just completed the G-20 talks in Cannes yesterday, most of the key global leaders are now on their way to the Asia Pacific Economic Coordination (APEC) Summit meeting to be held in Honolulu this coming weekend.

The cast of characters will be somewhat different in that the Europeans won’t be there while many more from Latin America, the Pacific, and South East Asia will be. Nor will the Honolulu meeting be wholly obsessed with the fate of Greece, the Euro, and the EU as the Cannes meeting just was. But in a broad sense, the major topic will be the same — how to make globalization work in a world that is nominally dedicated to free trade but that is actually half dedicated to free trade and half to export led growth and strategic trade strategies otherwise known as mercantilism.

Behind the problems of the Euro and the EU lies the great chasm between the chronic trade surplus and creditor countries (Germany, The Netherlands, Austria, Finland, Ireland, Belgium) and the chronic trade deficit and debtor countries (Italy, France, Spain, Greece, Portugal). The crux of the matter is that for the system to work, the creditors must lend to the debtors. Virtue is associated with being a creditor and vice with debt, but export led strategic trade polices cannot work unless someone buys and chronic trade surpluses cannot persist except in tandem with chronic trade deficits. The European system is not working at the moment because the creditors, especially the Germans, are unwilling or unable or both either to increase domestic consumption and thereby reduce their exports and trade surplus or to fund the rising debt of the deficit countries without driving them into years of grinding austerity and politically unsustainable unemployment.

In this situation, the United States, as a non-member of the EU and as a massive debtor with little ability to contribute to a European bailout, had little beyond hortatory influence. China loomed larger because its dollar reserve war chest of about $3.5 trillion made it a potential investor in an EU bailout fund. Nevertheless, it’s influence was also limited by the fact that it too is not an EU member. In Honolulu, the same issues of rebalancing to regenerate growth will be on the table. This time China and the United States will be the main protagonists as the main creditor and main debtor respectively. In this case, the creditor appears to be unwilling or unable or both to allow its yuan to appreciate and to take other steps to stimulate a relative increase in domestic consumption that would reduce exports, allow an increase in imports, and thereby foster a rebalancing that would stimulate growth throughout the system. At the same time, the debtor is being urged to take austerity measures to cut its debt, but hesitates but hesitates because doing so in the absence of potential for a great increase in exports to China and other countries that manage their currencies to remain competitive with China implies an increase in already historically high unemployment levels. As a result of this impasse, globalization is also not working in the Asia-Pacific region.

In a separate effort, the United States is pushing conclusion of the so called Trans Pacific Partnership (TPP) Free Trade Agreement (FTA) as a way of further opening markets and stimulating its growth through an increase in exports. While the intention is good here, it is of the variety that paves the road to hell. The proposed TPP is another standard plain vanilla FTA deal like all the ones that have already failed effectively to open Asian markets and reduce global imbalances. It has no provisions for dealing with currency manipulation, chronic trade surpluses and deficits, competition policy, and the fundamental asymmetries between strategic trade and laissez faire trade policies that give rise to the imbalances to begin with. The TPP will fail to solve any of the problems at which it is ostensibly being aimed.

What is needed in the APEC region as well as in Europe is the introduction of measures that will end the asymmetries in the global trade structure. Either the United States and other debtors must begin to imitate the polices of China and the other creditors or they must begin to imitate the policies of the debtors. In other words, either China must move dramatically toward a more liberal trade and investment regime or the United States must adopt strategic trade and investment polices a la China. There is simply no middle ground.

Globalization will continue not to work until the asymmetries between strategic trade and so called free trade are removed. Unfortunately, no more than the G-20 at Cannes are the APEC countries in Honolulu likely to do so.