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Potential disputes are simmering over imbalances in world trade

0 1545 Market Intelligence

Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

Each of the world’s economic neighborhoods has its own idiosyncrasies. The post-recession Toronto G20 Summit in early summer was supposed to achieve balanced growth among nations and reduce trade conflicts. What has since transpired has not been a roaring success.

Each of the world’s economic neighborhoods has its own idiosyncrasies. The post-recession Toronto G20 Summit in early summer was supposed to achieve balanced growth among nations and reduce trade conflicts. What has since transpired has not been a roaring success. Much of what’s wrong in terms of the current world economic order can be tied to foreign trade. The winners with large trade surpluses are being accused of not doing enough to stimulate their domestic economies. Instead, they are relying on making more than their fair share of export sales. The losers are calling for action to force major net exporters to adjust their exchange rates. Much of the focus in the U.S. has been on hesitant consumer spending and disastrous housing markets. Consumer spending accounts for 70% of the total economy. The ongoing high unemployment rate has been a major problem. The same goes for reductions in net worth due to a peak-to-trough decline in home prices of more than 30%. Consequently, the personal savings rate has skyrocketed and paying down debt has become a priority ahead of discretionary spending. Another negative is starting to draw more attention. The U.S. trade deficit has widened again. This subtracts from Gross Domestic Product (GDP). Politicians in Washington have been singing the same song for years. The fixed-rate yuan policy adopted by China is both encouraging importation into the U.S. and taking away from U.S. firms’ abilities to sell into foreign markets. Canada is also facing problems in trade, but for a different reason. With the U.S. economy operating below capacity, Canadian exports have fallen behind, a situation exacerbated by the rise in value of the Canadian dollar to near parity with the greenback. This is largely a commodity price effect, although Canada’s relatively “good’ recession has been attracting foreign funds. Canada has its cherished-by-emerging-nations raw materials to fall back on, but true vitality will not be achieved until the U.S. is in much better shape. Due to physical proximity, Canada does not have the option of decoupling from the U.S. to the same degree as some other nations. In the meantime, the sovereign debt problems in Europe have achieved a surprising result. The initial drop in value of the Euro gave a boost to German export sales, particularly to surging Asia. Germany will likely supplant Canada as the G7 nation with the fastest GDP growth rate in 2010. China is using the excuse of strong German exports and spreading weakness globally to justify keeping its yuan where it is, up slightly versus the U.S. dollar as promised earlier this year, but not to any major degree. At the same time, the Chinese domestic economy is accounting for more of overall growth, as witness strong sales of cars, appliances and other consumer goods. Other nations within China’s sphere, including South Korea, Taiwan, Hong Kong, Singapore and Indonesia are struggling to keep their currencies in check as well, fearful that appreciations will apply the brakes to their economies. Australia’s dollar is widely traded as a proxy for the yuan. India never experienced a recession and continues to grow at a pace that’s only a small step down from China’s. Brazil has become Latin America’s biggest economy and through a combination of prudent energy policy (i.e., a heavy reliance on ethanol from sugar cane) and innovative agricultural practices (i.e., achieving more farm output per acreage), is contributing to the emerging nation phenomenon that is, in effect, carrying the world economy on its back. Japan is attempting everything in its power to lower the value of the yen. The methodology has been to buy U.S. dollars. Exporters of cameras, cars and electronic products have been openly lamenting and complaining about the damage caused by the strength in the value of the yen. China, Japan and a few other nations with large trade surpluses, have accumulated foreign currency stockpiles. This enables them to buy U.S. dollars to keep their own currencies low. That’s the source behind the outcry over unfair trade practices on the part of U.S. lawmakers. Some of the clearest indications of how all of this is upsetting world investment markets can be found in commodities. The price of gold has reached a record high, reflecting a lack of confidence in the fiscal and monetary policies of many nations. Especially concerning is the speculation that enormous additions to the money supply by the U.S. Federal Reserve, as well as by a number of other central banks, will have long-term adverse inflationary results. The same also partially explains why the world price of copper has moved up 30% over the last three months. With copper, there is also the matter of little new capacity being added in recent years. Plus Chinese demand has risen to about 40% of the world’s total, due to the pace of infrastructure investment in that nation. The increase in price of copper may have a more positive economic connotation than gold, however, due to its wide usage in a host of industrial products. It is interesting to note that if gold and copper prices lead to higher equity prices, by way of resource firm shares, this contributes to a feedback loop. Higher stock market values raise wealth and contribute to an improved sense of well-being on the part of both firms and families. Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick last update:Oct 12, 2010

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