PS Beware of wounded lions

By Kenneth Rogoff

CAMBRIDGE ― G20 leaders who scoff at the United States’ proposal for numerical trade-balance limits should know that they are playing with fire. The U.S. is not making a demand as much as it is issuing a plea for help.

According to a recent joint report by the International Monetary Fund (IMF) and the International Labor Organization (ILO), fully 25 percent of the rise in unemployment since 2007, totaling 30 million people worldwide, has occurred in the U.S.

If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions. The voter anger expressed in the U.S. midterm elections could prove to be only the tip of the iceberg.

Protectionist trade measures, perhaps in the form of a stiff U.S. tariff on Chinese imports, would be profoundly self-destructive, even absent the inevitable retaliatory measures. But make no mistake: the ground for populist economics is becoming more fertile by the day.

The new U.S. Congress is looking for scapegoats for the country’s economic quagmire. And, with a president who has sometimes openly questioned rigid ideological adherence to free trade, anything is possible, especially in the run-up to the 2012 presidential election. If trade frictions do boil over, policymakers may look back on today’s “currency wars” as a minor skirmish in a much larger battle.

In light of America’s current difficulties, its new proposal for addressing the perennial problem of global imbalances should be seen as a constructive gesture. Rather than harping endlessly on China’s currency peg, which is only a small part of the problem, the U.S. has asked for help where it counts: on the bottom line.

True, today’s trade imbalances are partly a manifestation of broader long-term economic trends, such as Germany’s aging population, China’s weak social safety net, and legitimate concerns in the Middle East over eventual loss of oil revenues.

And, to be sure, it would very difficult for countries to cap their trade surpluses in practice: there are simply too many macroeconomic and measurement uncertainties.

Moreover, it is hard to see how anyone ― even the IMF, as the U.S. proposal envisions ― could enforce caps on trade surpluses. The Fund has little leverage over the big countries that are at the heart of the problem.

Still, even if other world leaders conclude that they cannot support numerical targets, they must recognize the pain that the U.S. is suffering in the name of free trade. Somehow, they must find ways to help the U.S. expand its exports. Fortunately, emerging markets have a great deal of scope for action.

India, Brazil and China, for example, continue to exploit World Trade Organization rules that allow long phase-in periods for fully opening up their domestic markets to developed-country imports, even as their own exporters enjoy full access to rich-country markets. Lackluster enforcement of intellectual property rights exacerbates the problem considerably, hampering U.S. exports of software and entertainment.

A determined effort by emerging-market countries that have external surpluses to expand imports from the U.S. (and Europe) would do far more to address the global trade imbalances over the long run than changes to their exchange rates or fiscal policies.

Emerging markets have simply become too big and too important to be allowed to play by their own set of trade rules. Their leaders must do more to tackle entrenched domestic interests and encourage foreign competition.

Germany might rightly argue that it has followed a relatively laissez-faire attitude toward trade, and that it should not be punished, despite its chronic surpluses. After all, it has stood by as the euro has soared recently.

Nevertheless, Germany is a huge winner from global free trade, and it is hardly without tools and means to reduce its surpluses ― for example, by pressing to deregulate its highly rigid product markets.

Given all its recent economic challenges, it is remarkable how, so far, the U.S. has remained steadfast in its support of free trade. Even in cases where its rhetoric has sent mixed messages, U.S. policies have been decidedly liberal.

Consider the long-suffering U.S.-Colombia free-trade negotiations. Although one would never know it from listening to the Congressional debate, the main effect of an agreement would be to lower Colombian barriers on U.S. goods, not vice versa.

Colombian goods already enjoy virtual free entry to the U.S. market, while Colombian consumers would benefit enormously if their country were to reciprocate by opening its markets to U.S. goods and services. This has not happened ― one of countless examples of obstacles faced by U.S. companies around the world. All should be eliminated.

American hegemony over the global economy is perhaps in its final decades. China, India, Brazil, and other emerging markets are in ascendancy. Will the transition go smoothly and lead to a global economy that is both fairer and more prosperous?

However much we may hope so, the current rut in which the U.S. finds itself could prove to be a problem for the rest of the world.

Unemployment in the U.S. is high, while fiscal and monetary policies have been stretched to their limits. Exports are the best way out, but the U.S. needs help. Otherwise, simmering trade frictions could suddenly throw globalization sharply into reverse. It wouldn’t be the first time.

Kenneth Rogoff is professor of economics and public policy at Harvard University, and was formerly chief economist at the IMF. For more stories, visit Project Syndicate (www.project-syndicate.org). For a podcast of this commentary in English, please use this link: https://media.blubrry.com/ps/media.libsyn.com/media/ps/rogoff74.mp3.