Thursday, 29 January 2009

The Clouds Gather

We wrote last year about the New Nationalism (see post) as the force that would diminish the process of Globalisation. Two recent events have brought the New Nationalism into a sharp focus.

First, the new US Secretary to the Treasury has accused China of manipulating its currency against the dollar (see article). This talk is both silly and dangerous. It is silly because any financial relationship of the scale that is being discussed involves the voluntary actions of countless thousands of people. China is only able to maintain a soft peg against the dollar because the Federal authorities have a seemingly insatiable appetite for borrowing Chinese funds. Had the US raised taxes in the period 2004-07, had the US authorities tightened monetary policy, the appetite for Chinese funds would have been more limited.

The statement is dangerous because it is confrontational at a time when the premium has to be on co-operation of all nations. Who, does Secretary Geithner think, is going to lend the Federal government the funds it needs to finance the fiscal stimulus? The only nation in the world with those sums available is the Chinese government. In a rare, but candid, interview for The Atlantic (see article), Gao Xiqing - who controls $US200 billion of the Chinese Sovereign Wealth Fund in the US - warned the Federal government to "be nice to the countries that lend you money". In the UK we call this biting the hand that feeds you.

The second event that causes concern is the requirement that only US steel and iron is used on infrastructure projects financed by the bailout package (see article). Ignoring the obvious points of silliness - in a globalised world, what exactly is a 'US company' - this provision is dangerous to the extreme. The great fear is that we are starting to head towards the naive protectionism that made the Great Depression so 'great'.

We have also been here before. When George Bush came to office, he imposed punitive tariffs on foreign steel with the result that US consumers of steel had to pay more than necessary for their steel. The matter was resolved through the WTO in favous of the EU, and Bush only relented when faced with the prospect of legally imposed punitive tariffs on Foridian Orange Juice (remember Jeb Bush?).

The fear across the world is that we have yet another US President who will not honour international obligations (the WTO rules on state support), who acts unilaterally, and who acts with disregard to the interests of his close allies. In a recent post, we asked where the change was (see post). This is still a valid question.
We take the view that the clouds are definitely gathering, and that the storm could strike sometime this year. This is not a good time to have a novice at the helm of the ship of state.

© The European Futures Observatory 2009

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