Stoking global trade spot fires

As the US and China swap blows on currency manipulation, trade tensions are rising over Russia's gas exports. But the last thing the world economy needs is a outbreak of protectionism.

An almost inevitable consequence of the deep and protraction economic weakness in the 'once were wonderful' economies of the G7 is a lift in protectionist rhetoric and a heightened risk of protectionist policies.

While it is an exaggeration to suggest that global markets are about to see the outbreak of a fully fledged trade war, there are signs that the chronic unemployment rates, fiscal imbalances, politics and growth envy are seeing trade tensions rise.

One such spot fire on the trade front is in the US where, just weeks from the November 2012 election, President Obama announced that the US had filed a challenge at the Word Trade Organisation against China. The US is accusing China of providing export subsidies to its car and car parts manufacturers which is seen as a policy that unfairly damages US car producers. But rather than focusing his concerns squarely on the Chinese for this alleged action, Obama attacked his opponent, Republican Mitt Romney, accusing him of "profiting from outsourcing US jobs to China”. Obama also said, "you can’t stand up to China when all you’ve done is send them our jobs”.

Romney hit back saying that the Obama administration had been "too timid in confronting Chinese leaders” over the subsidies and that he would "take the fight to China”.

While the focus of the debate and action from Obama over the car industry probably has most of its impetus from internal politics in the US, the fact that the Chinese government retaliated by filing its own claim against the US is powerful. China is arguing that the misuse by the US of the anti-dumping provisions of the WTO is hurting parts of Chinese manufacturing. The quick retaliation from China shows that it will not suffer potentially protectionist action from the US without a fight. At its worst, it suggests there is a risk of something sinister brewing on the trade front. China’s complaint focuses on the US having wrongly applied anti-dumping import duties on items such as paper, steel, tyres, magnets, chemicals, kitchen appliances and wood flooring.

A rise in protectionist policies would restrict global trade and with it, economic growth. Inefficient industries would be protected by trade and other barriers which would undoubtedly do more harm than good for the global economy.

The debate accompanies the ongoing concern that the US has with China 'manipulating' its currency – that is, pegging the yuan to a level that makes it unfairly competitive. The US continues to cite the still massive trade imbalance between the US and China as a reflection of the yuan’s artificially low and manipulated level.

China has promised to move to a more market determined exchange rate, but on a timetable of its choosing which is widely assumed to be many years away. In the mean time, the Chinese authorities continue to hold the yuan low and as a result, its export competitiveness is boosted at the expense of otherwise robust competitors.

The trade tensions are not limited to the US and China.

The European Commission is investigating Gazprom, the Russian monopoly gas supplier for irregular practices in its distribution of gas. It is alleged that Russia is using the threat of withholding supply to court favour and influence in countries that are dependent on Gazprom’s gas. These countries are willing and able to pay fair market prices for the gas, but Gazprom is accused of abusing its monopsony power to try to extract above market prices. As a result, many customers especially in central and eastern Europe are begrudgingly paying inflated prices, although they are taking the alleged market manipulation to the EC.

In the near term, there is not much they can do with little power to retaliate against Gazprom and Russia. The injured countries can, rather, retaliate with diplomatic and strategic threats, but this is often impractical for countries like the Ukraine and Latvia against the might and bullying from Russia.

All of which just adds to the global trade tensions.

It is to be hoped that the rhetoric from the US is just that and that the cases before the WTO are dealt with quickly and settled without further escalation. Indeed, it will be vital that after the WTO hands down its rulings, global trade remains freer rather than constrained. So too with the Russians and Gazprom, especially coming into the European winter when demand for gas increases sharply.

Just when there is a little light at the end of the tunnel for the world economy, the last thing it needs now is a fully blown trade war between China and the US – or anyone else for that matter.