In the Great Depression or what we might still come to re-name as GD1.0 one of the catalysts for the big drop was the rise in protectionist tit-for-tat trade tarrifs. It has become an article of faith for Free-market experts that such protectionism is always and everywhere a terrible thing to do.
So, until now it hs been avoided. Instead we have had protectionism by the backdoor, via currncy devaluation. By one means or another every country has been happy to see its currency devalue. And those that have not seen it happen on its own have not been averse to giving it a helping hand.
In many ways Europe has not been sad to see the Euro devalue. The trick is to let it sail close to the wind but not allow it to be capsized completely.
The main friction between the US and China is over China’s perceived ‘manipulation’ of its currency. Geithner felt compelled to go to China in person to tell them to allow their currency to appreciate. But with the announcement today of a huge surge in Chinese exports and a worsening of the US/China balance of trade angry voices in Congress have been raised. Congress is now threatening to legislate in as little as two weeks to slap tarrifs on Chinese goods. Protectionism! But, they will argue, not really just re-leveliing the playing field against China’s refusal to stop keeping its currency artificially low. Which would be…protectionism actually. Doesn’t bother me but makes the Free-market zealots look even more foolish – if that were possible.
The South Koreans are going to devalue I think. And other countries in Asia are now reacting to the weak Euro with currency controls. Protectionism rises again, just in a different guise.
Japan is also trying to devalue its currency by, it seems to me, trying to talk it down. Today’s talk by the new Prime Miinster about the debt overhang and how Japan could be seen as being in a position like Greece. Either very unwise or a full on attempt to force through fiscal tighening at home and create a market move away from the Yen to weaken it realitve to the dollar.
If the US Congress does legislate to put tarrifs on Chinese goods, expect some major anger and retaliation.