We are told by economists of the classical school that protectionism in the 1930s made the Great Depression worse. But evidence from the CLSA Japan forum suggests it is free market policies themselves that are forcing countries to become increasingly autarkic -- a word last used in the 1930s, referring to economies becoming self-reliant.
One of the most striking comments in this vein came from CLSA's auto analyst Christopher Richter. His solution to the Japanese carmakers being clobbered by the strong yen is to move their production offshore.
"Toyota would have made a profit this year if the yen had not strengthened so much against the dollar. In order to avoid such a terrible currency mismatch, Toyota should build its cars in the markets where it is selling them, in the US and Europe. Factories outside Japan should therefore be expanded at the cost of factories inside Japan," he says.
Currently, Toyota builds more cars than it can sell in Japan, and exports them.
The implications of Richter's comments are remarkable: namely that FX rates have become so incredibly volatile that normal trade is value-destroying. (Volatility hasn't been confined to FX of course: the performance of oil prices has been equally extreme and equally baffling to many observers.) The traditional solution is for companies to hedge their exposure through financial products bought from investment banks. For reasons that are unclear -- perhaps simply because the swings have been so unprecedented -- this strategy has clearly not worked very well.
One lesson is that one should not assume free trade benefits from free flows of capital -- indeed, the experience of the Japanese carmakers proves the contrary. During the first period of globalisation and free trade in the decades before World War I, free trade was anchored by a very strict version of the gold standard (that is, compared to the post-World War I version), which prevented countries going into long-term deficit or surplus. In other words, it would have been impossible for export volumes to rise to the levels they have risen to in Japan, Germany and China.
Some Japanese observers, always less keen on the unregulated markets than the American and UK schools of thought, have long believed that volatility in free financial markets is excessive and helpful to investment banks rather than to manufacturing, export-oriented businesses.
In fact, rather than urging everybody to keep their borders open, Western leaders should note that the explosion in world trade in recent decades has been the symptom of a dysfunctional financial system, where trade was financed by debt and extreme imbalances. So a decrease in trade will naturally accompany deleveraging.
A second factor which indicates that international trade flows will slow is the fact that US consumers have increased their savings rate, meaning that they will reduce their spending on imports. According to CLSA's head of Japan research, Andreas Shuster, America's savings rate is now higher than Japan's. For their part, Asian consumers are being urged to spend more, to make up for the loss of demand from trade deficit countries in the West. But spending on imports from Western countries will not stimulate domestic demand. Spending on imports is the equivalent of exporting jobs in an environment when unemployment is soaring -- CLSA's chief strategist, Christopher Woods, estimates the jobless rate could reach 10% in Japan by the end of this year, for example.
A third factor which will turn economies inwards is fiscal stimulus. Whether the stimulus comes in the form of traditional public works, as in Japan, or combined spending on social security, health and education as well as public works, as in Western countries, such benefits, almost by definition, will stay within the domestic economy. It would be a wasteful contradiction to generate expensive jobs through what are government/taxpayer subsidies while encouraging imports. After all, imports detract from GDP figures, and maintaining GDP is what today's governments are all focused on. (This is not mercantilism, since exports have crashed anyway, as the Toyota experience testifies.)
A fourth factor is that people are poorer, which will diminish demand, including trade, in any case. Academic theories advocating free trade in conjunction with free markets have not yet been defeated. But there seems to be a substantial shift afoot reflected in companies re-focusing within their borders, or as in the Toyota example, combining factories and sales in one country. Clearly, free trade with free capital markets created a terrific bubble, which is now deflating with terrible consequences. |
