Globe and Mail (Toronto)
Feb. 19, 2013
JOHN HANCOCK
History may not repeat
itself, but the parallels between the world economy in the 1930s and the world
economy today are becoming hard to ignore. Then, as now, the world was in the
grip of a severe economic downturn and painfully high unemployment. Then, as
now, governments tried to restore growth and exports by devaluing their
currencies and carving out trade blocs, risking a chain reaction around the
world. Then, as now, the system was rudderless, unstable, and insecure – which
persuaded countries to protect their own national interests, even at the
expense of the collective good.
The world has not yet
plunged into a full-scale currency war, but the trends are not good. This fact
was implicitly acknowledged by G7 finance ministers meeting last Tuesday who went
out of their way to renounce “targeting exchange rates,” only to sett off a new
and even larger wave of currency volatility. China continues to rebuff pressure
to end the fixed and undervalued Yuan, exacerbating global imbalances and
fuelling accusations of beggar-thy-neighbour trade strategies. The U.S.
continues to drive down the dollar and flood the world with capital through
successive rounds of quantitative easing. Brazil, Switzerland, and others
continue to intervene aggressively intervene in markets to arrest their
currencies from appreciation.
The latest salvo is
Japan’s decision in December to pursue a radically expansionary monetary
policy, which is both pushing the yen to new lows against all major currencies
and dramatically ramping up global currency tensions. Korea is threatening “an
active response,” Russia is warning of reciprocal devaluations, Venezuela has
just announced a massive devaluation, soon to be followed by Argentina, while
the euro zone is again split between France, which is demanding immediate
action to weaken a fast-rising euro, and Germany, which is so-far resisting
political interference in the European Central Bank. Not without reason, Jens
Weidmann, Germany’s Bundesbank president, warned last month that the growing
politicization of exchange rate policy was unleashing a global “race to the
bottom.”
Recent actions on the
trade front, though less volatile, are just as worrying. For the first time in
history, the United States and Europe are talking seriously about forming a vast
transatlantic free-trade bloc, encompassing half the world’s economic output.
This follows the United States’ equally ambitious strategy to link ten or more
“like-minded” Pacific Rim economies in a Trans-Pacific Partnership Agreement.
Both initiatives are clearly aimed as much at restoring the West’s dwindling
leverage vis-à-vis China and other recalcitrant emerging giants as at
increasing intra-bloc trade. As Joao Vale de Almeida, the EU’s ambassador to
Washington, recently put it, “if we get the [transatlantic] agreement right, we
can call the shots around the world.”
These trade trends also
have historical echoes. The Great Depression entered its most virulent phase
not during the financial crisis of 1929, but during the trade crisis that
followed, when the U.S.’s infamous Smoot-Hawley Tariff of 1930 set off an
escalating global trade war and splintered the world economy into rival
regional blocs. World trade collapsed, falling by an astonishing two-thirds
between 1929 and 1932.
To repeat, 2013 is not
1931. Global economic integration is deeper today, trade and capital flows are
greater, and governments have less scope to manipulate exchange rates or even
tariffs in the face of powerful market forces. Policy-makers have also
presumably learned from past mistakes. The current international economic
system – composed of the International Monetary Fund, the World Bank, and the
World Trade Organization (formerly the General Agreement on Tariffs and Trade)
– was specifically designed to prevent a replay of the competitive devaluations
and trade battles that caused the economic chaos of the 1930s and, ultimately,
the outbreak of war. The fact that G7 finance ministers are clearly conscious
of the currency war threat shows that the world has made progress.
Is it enough? In his
seminal The World in Depression, Charles Kindleberger argued that the root
problem in the 1930s lay less in countries’ “mistakes” than in their collective
lack of faith in the possibility of an international solution and the absence
of an actor powerful enough to provide leadership. In 1929, the old hegemon,
Britain, “couldn’t” stabilize the global economy and the new hegemon, the
United States “wouldn’t,” Mr. Kindleberger observed. This left countries
scrambling to protect their narrow national interests, with the result that
“the world public interest went down the drain, and with it the private
interests of all.”
Widespread financial
instability and volatility, lack of trust in international co-operation, and a
diminishing global hegemon with no obvious successor…it all sounds a little too
familiar.
John
Hancockis senior counsellor at the World Trade Organization. This
article is published in partnership with theCanadian International Counciland its
international-affairs hubOpenCanada.
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