Recent weeks have not been encouraging for the future of global economic cooperation and righting of huge trade and financial imbalances. Governments look nervously at each other, pretend big problems are just minor ones requiring modest adjustments and shy away from big decisions. Mutual suspicion between nations and policy divisions at home compound a natural tendency to hope that problems will solve themselves rather than requiring tough decision-making.
The four examples during a long and languid summer could make for a distinctly uncomfortable autumn and winter for world markets.
'Bizarre' opposition to CNOOC bid
Example One: The withdrawal of the CNOOC bid for Unocal. One can query the political wisdom of a Chinese state company making such a bid at this time. However, no one can doubt its legitimacy in the context not only of the freedoms which the US proclaims to represent but also in terms of the necessity of China investing its surpluses in US dollar assets. There have been two truly bizarre aspects to US opposition to CNOOC. Firstly, most of Unocal's oil and gas assets are outside the US! Secondly, that US congressmen are up in arms about China buying a US company but care not a jot about China buying US government debt, without which the said congressmen would not be able to fund the foreign wars and local boondoggles that explain an immense budget deficit and an even bigger current account deficit. For sure, US companies cannot readily buy major Chinese ones. But that is beside the point. China's restrictions apply to all foreigners. But in the CNOOC case, China has been singled out for discriminatory and hostile treatment. Not that the Chinese side played its cards well either. There was a notable absence of political support for the deal and a failure to show any flexibility in its approach – for example, by offering to sell the US hydro-carbon assets.
Lagging currency reform
Example Two: China's snail's pace reform of its currency system. It has now taken Beijing three years to get to the point of making any change. And now that it has made a change in principle, its practical impact is miniscule at a time when major adjustments are needed to currency regimes. It would be wrong to place the blame on China alone. All of East Asia must recognize that their combined surpluses are unsustainable and that they are prolonging the ability of the US to pursue dangerous, predatory fiscal and monetary policies. The statements emanating from Beijing since the ending of the formal dollar peg have been confusing to say the least. If that were a deliberate ploy to keep speculators off balance it would be justifiable. However, it seems more to do with policy uncertainty in Beijing resulting from a clash of economic interests. The PBOC should be the principal voice determining the currency issue but its power appears constrained by other influences with less understanding either of macroeconomic or international financial issues. This is worrying given the importance of these issues to an international trade which is now so important to China.
Slow pre-Doha momentum
Example Three: By the end of July, members of the World Trade Organization were supposed to have enough understanding on key issues to map out a clear path towards the ministerial meeting in Hong Kong in December. This has not been achieved. It does not mean that the Doha round is doomed but it means that the next few months will be even more vital if there is to be agreement on the issues that really matter "of which agriculture is the most contentious but not the only stumbling block. At a time when the US should have been focusing on this, it has been preoccupied with getting its Central America Free Trade Agreement through Congress. Though this has finally been narrowly achieved, the political cost to the administration of an agreement which is of negligible importance to global trade is a worry. It seems unlikely that the political environment in the US for more trade liberalization will improve, and could well deteriorate further. The same applies in Europe. Bold leadership and willingness to make concessions by the leading developing countries, particularly China, India and Brazil on non-agricultural issues, may be necessary to break the agriculture impasse. That would be unfair given that this is supposed to be a "development round" but it may be better for such countries to look to the benefits of a global trading system in which they should play an ever bigger part.
US rates slow to rise
Example Four: The baby steps increase in US interest rates. Even after 10 increases at 3.5%, the federal funds rate is still under 1% in real terms-and even less if one uses the same criteria to define inflation as in the Eurozone. The growth of financial instruments and accommodation has been on such a scale that bonds yields have fallen even as short rates have risen. The expansion of household credit on the back of massive increases in housing prices, itself attributable to extraordinarily low interest rates, has been shockingly irresponsible. Together with the fiscal deficit, it explains much of the fact that the current account deficit is nearing 6% of US GDP. The refusal of Mr. Greenspan to accept that a reserve currency country cannot forever abuse its power without endangering the system itself, as well as loading an aging America with debts that it is unlikely to be able to repay, is very dangerous. Greenspan's playing to the Wall Street gallery while accommodating Bush's fiscal excesses will land his successor next year with the almost impossible task of achieving a soft landing for both currency and economy while keeping trade open.