The next global crisis?
As financial crises calm, bahts may yield
to bananas and beef in trade war
Special Report - Trade: The next global crisis?
March 5, 1999: 3:24 p.m. ET
As I look into the psychology 'rallies and sell offs' of the market, following two reports are important in contextual terms to bring some real pressures for markets to test supports.. we can come back to test as low as 1192 even after testing 1330....
LONDON (CNNfn) - It's less than two years since
the collapse of the Thai baht triggered a domino effect
bringing chaos to the world's emerging economies. The
next cataclysm, however, may begin not with bahts but
with Airbuses, beef, or genetically-modified beets, not
to mention steel or bananas.
In the New World Disorder born of the "global
economic crisis", commerce -- not currencies --
threatens to become the front line in a new international
clash over what constitutes good mercantile behavior.
So far, few signs suggest the divide may be bridged
soon. As economic turmoil festers in large pockets of
the world, the overarching fear in more affluent nations
is that distressed regions will seize upon exports as an
elixir to cure their ills.
Global trade talk these days brims with pointed
barbs about export "dumping" and the onus of
"restrictive" import barriers. The assumption underlying
the debate is that too many cheap imports are "bad"
for an economy, a contention that consumer advocates
tend to reject.
Some experts, alarmed by weakening demand and
global overcapacity in a slew of sectors, see a more
virulent strain of economic contagion in the months
ahead.
"I fear the financial crisis of 1998 may become the
trade crisis of 1999," William Daley, the U.S.
Secretary of Commerce. intoned in a speech in New
York earlier this month.
Barbs from Brittan
Sir Leon Brittan, the European Union's Trade
Commissioner, went so far Friday as to accuse the
U.S. of acting like a "rogue state" for slapping tariffs on
a range of EU imports before the World Trade
Organization had issued a final ruling in a brewing
banana brouhaha.
"I think it's an act of petulance and arrogance to say
not only do we demand what we demand, but we
insist on taking it before anybody has given an
independent ruling that we're entitled to," Brittan told
CNN.
Perhaps nowhere is the sense of imminent danger
more fervently felt than in the United States, which
feels it has the most to lose from being expected to
snap up products other countries sluff off.
The U.S. economy grew at a surprising 6.1 percent
annualized rate in the fourth quarter, its most rapid
pace in more than a decade. Many officials see an
omen in the disparity between America's economic
resilience and the more sluggish growth scenario in the
rest of the world.
Today's transatlantic brickbats with Europe over
bananas, some analysts believe, could flare into
tomorrow's knock-down battles in sectors ranging
from airlines to financial services.
Not bearing a fair burden?
Even where common ground exists, it is often
based on mutual distrust of others. Both Europe and
the United States bristle at the notion that Asia -- code
word for 'Japan' -- may regard their markets as a
sponge for their cheap unwanted products.
The anxiety is evident in the mutual recriminations
between Brussels and Washington about how the
other side is not bearing its fair share of the "burden" in
soaking up imports from Asia or Latin America.
Daley's remark about a looming trade crisis may
seem overdrawn. But viewed in the context of official
laments that the U.S. is now "the importer of first and
last resort," it suddenly seems less far-fetched.
Naysayers look at the U.S. tussle with Japan over
steel "dumping" and a widening rift with the Europeans
over hormonally-treated beef, and see the incipient
signs of "decoupling."
That's a fancy way of saying that unless the rest of
the world can get its economic act together and rectify
trade imbalances, America may simply opt to go it
alone in the economic arena.
In reality, economists argue, a U.S. attempt to
counter global weakness by balkanizing itself
commercially -- or decoupling -- would be tantamount
to cutting off its nose to spite its face. They note the
Europeans are likely to feel similarly, despite
grandstanding to the contrary.
Graham Bishop, an adviser on the single European
currency to Salomon Smith Barney, said his "gut
instinct" is that there is little willingness on the part of
the Europeans to touch off a trade war.
"The solution to low growth in Europe," he added,
"is not going to be exporting its way out of the
problem." These days, Bishop noted, the euro-zone is
so self-contained that exports amount to only 10
percent of GDP. In the time before the euro, that
number was as high as 30 percent.
A raft of dreary economic data
Recent data suggest why European anxiety is
cresting.
Industrial production declined 0.2 percent across
the 11-nation euro zone in December. In hard-hit
Germany, the economic engine of Europe, storm
clouds have been stacking up on the horizon for
months. In the latest dollop of sour data, the German
Chambers of Commerce and Industry on Tuesday
lowered the growth forecast for 1999 to 1.5 percent
from 2 percent.
Meanwhile, the fledgling new currency, the euro,
has mirrored the continental slump with a steady
decline since its Jan. 3 launch. In recent days the
currency has slipped below $1.09, hitting a lifetime low
nearly 7 percent below its $1.17 launch level.
"What both blocs (Europe and the United States)
would like to see are ways of limiting cheap imports
from less-developed countries into their countries,"
said Ian Harnett, a European strategist with BT Alex.
Brown in London. But "with everybody squealing
about Latin America and Asia, it's not politically
correct to take a pot-shot."
Many economists scoff at the notion of an
export-driven growth strategy. They say consumer
demand remains buoyant in many European nations,
and point to developments suggesting Asia is getting
serious about granting freer access to its markets and
investment in infrastructure.
Daley, in his New York speech, pointed out that
U.S. exports to the rest of the world rose 4 percent in
1998 even as they plunged 14 percent, or $26 billion,
to Asia.
"That huge drop," he said, "accounted for about half
the increase in our trade deficit, which I am unhappy to
report set another record in 1998, the fifth year in a
row."
But Robert Subbaraman, a Tokyo-based regional
economist with Lehman Brothers, said while volumes
of exports across Asia have grown over the past year,
weak prices have meant total values have decreased.
Still, Subbaraman sees some potential for trouble.
"The risk is that if the U.S. and EU slow down, the
export-market pie is going to get smaller and
smaller…and that's going to lead to protectionist
policies," he said.
Already, Subbaraman said, Indonesia's government
has proposed a 40 percent levy on rice imports to help
its cash-strapped rice farmers, while the Philippines
recently hiked tariffs on chemicals.
But he added: "I would say at this stage, the main
trading bodies such as ASEAN (Association of South
East Asian Nations) or APEC (Asia Pacific Economic
Cooperation) realize a move towards trade
protectionism would be a step backwards."
Talk of trade war overblown
Others believe talk of a full-blown trade crisis is
overblown.
Andrew Shipley, an economist with Schroder
securities in Tokyo, said the wealth being generated by
U.S. subsidiaries in Asia, such as General Motors in
Japan, offsets the concerns about steel and other
exports.
"The view from Tokyo is that a strong dollar is
desperately needed in the global economy," Shipley
said. For 1998, Shipley said, Japan is expecting
exports to drop 1.6 percent.
"This is what the U.S. has wanted for years --
market access in Asia -- and if they blow this" because
of trade, that would be a shame, Shipley said.
Subbaraman agreed.
"The U.S. can complain about all this, but the flip
side is that sure, the U.S. is importing a lot more than
they are exporting at the moment, but Asia could just
as easily withdraw their investments in the U.S. They
can say we (the U.S.) has to buy all of Asia's exports,
they're not buying ours."
--by staff writer Douglas Herbert
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