We may be entering an era of creeping de-globalization. It is one thing to be generous with the perceived foibles of your trading partners when your economy is growing and jobs are plentiful. It is quite another to decide to be tolerant when your economy is struggling, and domestic political pressure to create jobs and raise wages is increasing.
Which is the case both in China and the United States. America is in the midst of a drawn-out election campaign, with candidates vying for the China-basher-of-the-year award. Eager to shift blame for high unemployment and to appease an electorate that believes the country to be headed in the wrong direction, President Barack Obama is letting it be known, most especially to his trade union allies, that he is going to get tough on China for its currency manipulation, export control on rare minerals, buy-China policy, and theft of intellectual property. To which Republican candidates respond with even tougher statements.
Meanwhile, control of the Communist party apparatus that runs China is about to change, the so-far peaceful version of regime change, and the new boys in charge are as eager to prove they are no pushovers for the tough-talking Americans as the American politicians are to prove they are no pushovers for the wily Chinese. And, in a situation similar to America’s, China’s manufacturing sector is not as robust as the powers-that-be would like. It is suffering its worst quarter in three years, economic growth has slowed for five successive quarters, and layoffs are running at their fastest rate in three years. “Worse may lie ahead,” says Markit’s chief economist Chris Williamson. And because wages are being raised at double-digit rates to appease a restive work force, the nation’s competitiveness is being reduced. Indeed, China has reached a point where its export-led model is under such serious threat that major reforms are being mooted.
Neither these facts—China is, after all, projecting a growth rate around three times what the U.S. expects -- nor the recent trade deficits recorded by China can defuse anger with its willingness to erect barriers to American goods, including its recent decision to levy tariffs ranging from 2 percent to 21.5 percent on U.S.-made cars, apparently in retaliation for America’s decision to levy duties on imports of low-end tires made in China. As World Bank president Robert Zoellick is fond of warning those who would get tough with China, once you start a trade war, there is no telling how it will end. Tires today, autos tomorrow.
If the tiffs between China and the U.S. were the entire story, it could be written off as a phenomenon that will pass once the US elections are over and the new regime in China settles in. After all, China has been manipulating its currency for decades, and the squeals of outrage from members of congress mount whenever a member of China’s ruling class visits the United States, only to subside when he is gone—or, like soon-to-be-president Xi Jinping, has reminded farmers in key electoral states how much they export to China.
There are two reasons to believe that this brawl will prove more enduring and more widespread. For one thing, the informal China lobby, American businessmen hopeful of tapping the huge Chinese market, have traditionally pressured Washington politicians to cool it, to avoid an all-out trade war. That lobby seems to be fed up with restrictions on American companies’ ability to sell their goods in China, and with the persistent theft of their intellectual property—what Bloomberg Businessweek calls “The Great Brain Robbery.” So it has gone virtually silent, removing a key brake on the willingness of any American administration to retaliate.
Moreover, China’s practices are now provoking reactions in countries other than the US. Germany has two new reasons for concern. The Chinese government has ordered its bureaucrats to stop buying foreign—mostly German—cars and spend their $13 billion annually on made in China vehicles. This has German auto makers, especially Volkswagen, unhappy, since Audis are the bureaucrats’ vehicle of choice, and they buy 6.5 million vehicles annually.
Germany is also upset because the $30 billion in annual subsidies lavished by the Chinese government on its manufacturers of solar panels and cells is hurting German companies, until now leaders in that industry. It is the U.S. unit of Germany’s Solar-World AG that has led the successful call for the imposition by the U.S. of tariffs on China’s manufacturers of solar panels and cells, recipients of $30 billion annually in government subsidies.
Add Brazil to the unhappy trading nations. It attributes the woes of its manufacturing sector to cheap Chinese imports and dumping by developed countries. “We are not going to just sit by while other countries devalue their currencies to give them a competitive advantage…. We don’t want to lose our manufacturing sector,” announced Brazil’s finance minister Guido Mantega. So taxes on foreign cars have been raised, and state-owned Petrobas will direct about 75 percent of its $225 billion capital programme, the world’s largest for any corporation, to local suppliers, a buy-local move also being considered by the EU. More important, Brazil is re-introducing currency controls to prevent the value of its real from rising. These are not “protectionist measures,” claims Mr. Mantega, they are “defensive measures” in response to “non-competitive mechanisms.”
Another developing nation has joined the flight from globalization. “India is not a no-tax country, … not a tax haven, zero-tax or low-tax country,” announced finance minister Pranab Mukherjee. His new budget proposes a tax on some international mergers, retroactive to 1962. Of the foreign companies that have bought assets in India, Vodaphone is the most at risk, liable for $2.2 billion in taxes on its purchase of Indian wireless operations. Mr. Mukherjee denies this will have an adverse effect on much-needed direct foreign investment.
Then there is the problem of China’s restrictions on the export of minerals, including rare earths essential to the manufacture of high-tech goods such as hybrid cars, iPads, and missiles. The EU and Japan have joined our complaint to the World Trade Organisation; China claims its export restrictions are aimed at protecting the environment rather than distorting trade.
Whether all of this represents a fraying around the edges of the trading regime that has accompanied globalization, or the beginning of a return to autarky is difficult to say. But we can say that the constituency for free trade, always dispersed and less noisy than advocates of protectionist measures, is in retreat.