Monday, March 16, 2009

Is there an economist in the house ?

Looking for an export expert.

Is there any linkage between falling exports and rising protectionism, or mere coincidence? John Mauldin implies there may be in his latest Thoughts From the Frontline (may need to register your email address, but it's worth the effort for his thoughts).

Says he,
For over six years I have been writing that the one thing that could truly derail the world economy is protectionism. Nothing would be more deleterious in today's global economy.

And that brings us to this stark note I read today on Bloomberg. It sent chills down my spine: "American exports have slumped at a 44% annual pace in the most recent six months of data, with imports shrinking 51%, probably the most since the Great Depression, according to Morgan Stanley analysts. The figures may add to pressure on the Obama administration to rework international agreements and include protections for US workers and the environment."

The US steel industry is planning to bring anti-dumping charges against foreign steel. India just raised steel tariffs. It seems like every day I read that someone somewhere is calling for their particular industry to be protected, bailed out, or subsidized. And it is not just the US. It is happening all over the world.
Consider these stories from recent days, beginning with the article Mauldin quoted from:

U.S. Economy: Imports, Exports Drop as Demand Weakens
The U.S. trade deficit narrowed in January to $36 billion, the lowest level in six years, on tumbling American demand for everything from OPEC oil to Japanese automobiles....
U.S. imports and exports decline in January
Trade between the United States and the rest of the world slid lower in January.... Although the United States is spending less in goods and services abroad, import levels have fallen far more steeply.... The trade deficit, a measure of the gap between imports and exports, shrank for a record sixth consecutive month in January, narrowing 9.8 percent to $36 billion.

"It will not represent good news to trading partners who have much spare capacity that had been used to produce mountains of products for the U.S. consumer," Joshua Shapiro, chief U.S. economist at the research company MFR, said in a note.
UK trade deficit widens to £7.7bn
Britain's trade deficit with the rest of the world widened by more than expected in January as exports to countries outside the European Union plummeted by 16%. Exports to the US were down 8.5% in January alone.
Exports Down Sharply for 2nd Month in China
China’s exports plunged by a record 25.7 percent last month.... China’s exports slowed abruptly for everything from toys and fashion accessories to steel and grain...
Japan's exports halved in January
Japan's current account recorded its largest deficit on record in January, reaching 172.8bn yen ($1.8bn; £1.2bn). It was its first deficit in 13 years.

Exports in January dropped a record 46.3% from a year earlier to 3.28 trillion yen, the fourth consecutive month of year-on-year declines, with exports to the US hardest hit, registering a 52.9% drop.

Car exports alone dropped 66.1%, with semiconductor and electronic parts exports down 52.8%.
Canada Lost Trade
Canada’s recession is deepening, with reports today showing a record trade deficit amid vanishing automobile trade.... The trade gap grew to C$993 million ($786 million), the largest since the agency began keeping records in 1971.

The world’s eighth-largest economy is shrinking faster than policy makers predicted just a few weeks ago, as a global credit crisis and a drop in commodity prices saps orders for Canada’s lumber, automobiles and metals.
The item that precipitated the protectionist plot in this context was Switzerland's sudden and monumental currency intervention. Mauldin called the Swiss move a "game changer" and said,
If the Swiss can move to take their currency lower, then there will be a score of countries that will ask why they shouldn't be allowed to do the same.

Whatever their reasons, the Swiss have opened Pandora's box. Do Senators Schumer and Graham now start talking about that major currency manipulator, Switzerland, and start to introduce bills to punish them? Will Secretary Geithner come before a Congressional committee and call the Swiss currency manipulators? If not, then how do we deal with China?

So, the shrinking US trade deficit, brought on by falling exports around the world, and the propensity of export experts to pummel their own currency, is perhaps presaging the protection that protracted the Great Depression, right?

Well, let's harken back a few years to this post and the article written by Professor Peter Morici, Robert H. Smith School of Business, University of Maryland:
Since December 2001, the U.S. monthly trade deficit has increased $37.7 billion [September deficit on trade in goods and services was $64.3 billion]. Petroleum, automotive products, and goods from China account for 86 percent of the trade deficit....

This has saddled the economy with a huge foreign debt and taxed growth, and Bush Administration policies have exacerbated these problems.

Many U.S. multinationals, like GE, Caterpillar and GM, have earned huge profits investing in protected Chinese markets, and have lobbied the Congress and Administration not to take action against Chinese mercantilism.

Rather than recognizing Chinese currency manipulation as protectionism, President Bush and his Treasury Secretaries have sided with the large multinationals profiting from Chinese mercantilism, and labeled as protectionist Americans advocating measures to offset Chinese subsidies—something the U.S. regularly does when subsidized imports from the EU or Japan harm U.S. industries.

So, perhaps, before we come to any conclusive economic judgment about any linkage between the relative measure of exports and so-called protectionism, we might look first at, and discount, the partisan agendas of those claiming politically protectionist policies are to blame. Guambat observes that economists, at least to the extent they carry on in the mainline press and commentary, on the whole are a pimpish bunch who tend to follow their political bent or own self-interest first and foremost. Not that there's anything wrong with that, so long as clearly disclosed and admitted so that we all know a paid political advertisement when we read or hear it.

See these posts and this article, Intervention, Manipulation, And Currency Wars.

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