Monday, 20 June 2005

The coming trade war and global depression

by Henry C K Liu

Many historians have suggested that the 1929 stock market crash was not the cause of the Great Depression. If anything, the 1929 crash was the technical reflection of the inevitable fate of an overblown bubble economy. Yet stock market crashes can recover within a relatively short time with the help of effective government monetary measures, as demonstrated by the crashes of 1987 (23% drop, recovered in nine months), 1998 (36% drop, recovered in three months) and 2002 (37% drop, recovered in two months).

There was no quick recovery after the 1929 crash. Structurally, what made the Great Depression last for more than a decade from 1929 until the US entry into World War II in 1941 were the 1930 Smoot-Hawley tariffs, which put world trade into a tailspin from which it did not recover until the war began. While the US economy finally recovered through war mobilization after the Japanese attack on Pearl Harbor, Hawaii, on December 7, 1941, most of the world's market economies sank deeper into war-torn distress and did not fully recover until the Korean War boom in 1951.

Barely five years into the 21st century, with a globalized neo-liberal trade regime firmly in place in a world where market economy has become the norm, trade protectionism appears to be fast re-emerging and developing into a new global trade war of complex dimensions. The irony is that this new trade war is being launched not by the poor economies that have been receiving the short end of the trade stick, but by the US, which has been winning more than it has been losing on all counts from globalized neo-liberal trade, with the European Union following suit in lockstep. Japan, of course, has never let up on protectionism and never taken competition policy seriously. The rich nations need to recognize that their efforts to squeeze every last drop of advantage out of already unfair trade will only plunge the world into deep depression. History has shown that while the poor suffer more in economic depressions, the rich, even as they are financially cushioned by their wealth, are hurt by political repercussions in the form of either war or revolution, or both.

Cold War and moral imperative
During the Cold War, there was no international free trade. The economies of the two contending ideology blocs were completely disconnected. Within each bloc, economies interacted through foreign aid and memorandum trade from their respective superpowers. The competition was not for profit but for the hearts and minds of the people in the two opposing blocs, as well as those in the non-aligned nations in the Third World. The competition between the two superpowers was to give rather than to take from their separate fraternal economies.

The population of the superpowers worked hard to help the poorer people within their separate blocs, and convergence toward equality was the policy aim even if not always the practice. The Cold War era of foreign aid and memorandum trade had a better record of poverty reduction in both camps than post-Cold War globalized neo-liberal trade dominated by one single superpower. The aim was not only to raise income and increase wealth, but also to close income and wealth disparity between and within economies. Today, income and wealth disparity is rationalized as a necessity for capital formation. The New York Times reports that from 1980 to 2002, the total income earned by the top 0.1% of earners in the United States more than doubled, while the share earned by everyone else in the top 10% rose far less and the share of the bottom 90% declined.

For all its ill effects, the Cold War achieved two formidable ends: it prevented nuclear war and it introduced development as a moral imperative into superpower geopolitical competition with rising economic equality within each bloc. In the years since the end of the Cold War, nuclear terrorism has emerged as a serious threat and domestic development is preempted by global trade, even in the rich economies, while income and wealth disparity has widened everywhere.

Since the end of the Cold War some 15 years ago, world economic growth has shifted to rely exclusively on globalized neo-liberal trade engineered and led by the US as the sole remaining superpower, financed with the US dollar as the main reserve currency for trade and anchored by the huge US consumer market made possible by the high wages of US workers. This growth has been sustained by knocking down national tariffs everywhere around the world through supranational institutions such as the World Trade Organization (WTO), and financed by a deregulated foreign-exchange market working in concert with a global central-banking regime independent of local political pressure, lorded over by the supranational Bank of International Settlement (BIS) and the International Monetary Fund (IMF).

Redefining humanist morality, the United States asserts that world trade is a moral imperative and as such trade promotes democracy, political freedom and respect for human rights in trade participating nations. Unfortunately, income and wealth equality is not among the benefits promoted by trade. Even if the validity of this twisted ideological assertion is not questioned, it clearly contradicts the US practice of trade embargo against countries Washington deems undemocratic, lacking in political freedom and deficient in respect for human rights. If trade promotes such desirable conditions, the practice of linking trade to freedom is tantamount to denying medicine to the sick.

US President George W Bush defends his free-trade agenda in moralistic terms. "Open trade is not just an economic opportunity, it is a moral imperative," he declared in a May 7, 2001, speech. "Trade creates jobs for the unemployed. When we negotiate for open markets, we're providing new hope for the world's poor. And when we promote open trade, we are promoting political freedom." Such claims remain highly controversial when tested by actual data.

Phyllis Schlafly, a syndicated conservative columnist, responded three weeks later in an article "Free trade is an economic issue, not a moral one". In it, she noted that while conservatives should be happy finally to have a president who added a moral dimension to his actions, "the Bible does not instruct us on free trade and it's not one of the Ten Commandments. Jesus did not tell us to follow Him along the road to free trade ... Nor is there anything in the US constitution that requires us to support free trade and to abhor protectionism. In fact, protectionism was the economic system believed in and practiced by the framers of our constitution. Protective tariffs were the principal source of revenue for our federal government from its beginning in 1789 until the passage of the 16th Amendment, which created the federal income tax, in 1913. Were all those public officials during those hundred-plus years remiss in not adhering to a "moral obligation" of free trade?" Hardly, argued Schlafly, whose views are noteworthy because US politics is currently enmeshed in a struggle between strict-constructionist paleo-conservatives and moral-imperialist neo-conservatives. Despite the ascendance of neo-imperialism in US foreign policy, protectionism remains strong in US political culture, particularly among conservatives and in the labor movement.

Bush also said China, which reached a trade agreement with the United States at the close of the administration of his predecessor Bill Clinton, and became a member of the WTO in late 2001, would benefit from political changes as a result of liberalized trade policies. This pronouncement gives clear evidence to those in China who see foreign trade as part of an anti-China "peaceful evolution" strategy first envisaged by John Forster Dulles, US secretary of state under president Dwight Eisenhower in the 1950s. It is a strategy of inducing through peaceful trade the Chinese Communist Party (CCP) to reform itself out of power and to eliminate the dictatorship of the proletariat in favor of bourgeois liberalization. Almost four decades later, Deng Xiaoping criticized CCP chairman Hu Yaobang and premier Zhao Ziyang for having failed to contain bourgeois liberalization in their implementation of China's modernization policy. Deng warned in November 1989, five months after the Tiananmen incident: "The Western imperialist countries are staging a third world war without guns. They want to bring about the peaceful evolution of socialist countries towards capitalism." Deng's handling of the Tiananmen incident prevented China from going the catastrophic route of the USSR, which dissolved in 1991.

Hostility in the name of 'freedom'
Yet it is clear that political freedom is often the first casualty of a garrison-state mentality and such mentality inevitably results from hostile economic and security policy toward any country the US deems as not free. Whenever the US pronounces a nation to be not free, that nation will become less free as a result of US policy. This has been repeatedly evident in China and elsewhere in the Third World. Whenever US policy toward China turns hostile, as it currently appears to be heading, political and press freedoms inevitably face stricter curbs. For trade mutually and truly to benefit the trading economies, three conditions are necessary: 1) the de-linking of trade from ideological/political objectives, 2) maintenance of equality in the terms of trade and 3) recognition that global full employment at rising, living wages is the prerequisite for true comparative advantage in global trade.

The developing rupture between the sole superpower and its traditionally deferential allies lies in mounting trade conflicts. The United States has benefited from an international financial architecture that gives the US economy a structural monetary advantage over those of the EU and Japan, not to mention the rest of the world. Trade issues range from government-subsidy disputes between Airbus and Boeing to those regarding bananas, sugar, beef, oranges and steel, as well as disputes over fair competition associated with mergers and acquisition and financial services. If either government is found to be in breach of WTO rules when these disputes wind through long processes of judgment, the other will be authorized to retaliate. The US could put tariffs on other European goods if the WTO rules against Airbus and vice versa. So if both governments are found in breach, both could retaliate, leading to a cycle of offensive protectionism. When the US was ruled to have unfairly supported its steel industry, tariffs were slapped by the EU on Florida oranges to make a political point in a politically important state in US politics.

Trade competition between the EU and the US is spilling over into security areas, allowing economic interests to conflict with ideological sympathy. Both of these production engines, saddled with serious overcapacity, are desperately seeking new markets, which inevitably leads them to Asia in general and China in particular, with its phenomenal growth rate and its 1.2 billion eager consumers bulging with rapidly rising disposable income. The growth of the Chinese economy will lift all other economies in Asia, including Australia, which has only recently begun to understand that its future cannot be separated from its geographic location and that its prosperity is interdependent with those of other Asia-Pacific economies. Australian iron ore and beef and dairy products are destined for China, not the British Isles. The EU is eager to lift its 15-year-old arms embargo on China, much to the displeasure of the US. Israel, with its close relations with the US, faces a similar dilemma on military sales to China.

Even the US defense establishment has largely come around to the view that the US arms industry must export, even to China, to remain on top. It was reported recently that US Defense Secretary Donald Rumsfeld tried to sell to Thailand F-16 warplanes capable of firing advanced medium-range air-to-air missiles two days after he lashed out in Singapore at China for upgrading its own military when no neighboring nations are threatening it (see Rumsfeld pitches in for F-16s, June 9). The sales pitch was in competition with Russian-made Sukhoi Su-30s and Swedish JAS-39s. The open competition in arms export had been spelled out for the US Congress years earlier by Donald Hicks, a leading Pentagon technologist in the administration of president Ronald Reagan. "Globalization is not a policy option, but a fact to which policymakers must adapt," he said. "The emerging reality is that all nations' militaries are sharing essentially the same global commercial-defense industrial base." The boots and uniforms worn by US soldiers in Afghanistan and Iraq were made in China.

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