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October 31, 2008
Exclusive: Global Economic Rivalries Intensify During Crisis
In 1997, as Asia was swept by a financial crisis that spread to other parts of the world, the United States offered to help stricken foreign economies recover. Washington joined the International Monetary Fund (IMF) interventions in South Korea, Indonesia, Brazil and Russia and agreed to a $17.9 billion increase in its IMF contribution. But it did far more than give emergency aid. In November 1997, President Bill Clinton said “I made a decision...that we would do everything we could to leave America's markets as open as possible, knowing full well that our trade deficit would increase dramatically for a year or two.” American consumers would send money overseas to create jobs and open factories in other lands.
A year or two became ten. In 2007, the U.S. ran a trade deficit of $700.3 billion, compared to $108.3 billion in 1997. Over the decade 1997-2007, America sent over $5 trillion to aid economic growth overseas, while losing millions of good-paying industrial jobs, including managers and engineers, here. Now that the United States economy is in trouble, will anyone show the same concern? The short and unsurprising answer is “no.”
Every country is looking out for its own interests, trying to preserve as large a share of a shrinking global pie as it can. That is the competitive nature of international economics.
Russia, Iran and Qatar took a large step toward forming a cartel in natural gas October 21st. The three countries account for nearly a third of world natural gas exports and 60% of global reserves. Russia has the largest known reserves, with Iran second. “We are consolidating the largest gas reserves in the world, the general strategic interests and, what is very important, the high potential for cooperation on three-party projects,” said Alexei Miller, CEO of Russia’s state-run Gazprom. The idea for the “troika” came from Iran’s supreme leader, Ayatollah Ali Khamenei last year.
Russia has also been meeting with the Organization of Petroleum Exporting Countries (OPEC). On October 22nd, OPEC Secretary-General Abdalla Salem El-Badri of Libya visited Moscow. Last month, Russian Deputy Prime Minister Igor Sechin visited an OPEC meeting in Vienna to talk of cooperation. Oil exports are another cash cow for Moscow. One motive for Russia’s invasion of Georgia was to demonstrate its ability to threaten the new 1,100-mile pipeline that carries oil from Azerbaijan's Caspian Sea fields across Georgia to world markets. Moscow wants to control access to the Caspian fields which are estimated to hold some of the world's largest reserves of both oil and gas.
Russia has earned an estimated $1 trillion in energy exports as prices surged in recent years, providing a huge boost to its economy. Moscow has translated this financial flow into a bid to regain great power status. A substantial amount of the profits from both oil and gas exports has gone to revive the Russian military.
The 13 member nations of OPEC agreed on October 24th to cut production by 1.5 million barrels per day in an attempt to slow price declines. Oil prices have dropped from a record $147 a barrel in July to below $64 a barrel as this is being written. According to Iran's OPEC Governor Mohammad Ali Khatibi, OPEC will cut production further if needed to stabilize prices.
China’s trade surplus may reach $400 billion this year, based on industrial production rather than energy. Estimates are that as the world slides into a recession, the export markets on which Beijing has relied for its double-digit growth rate will shrink. Chinese expansion may fall to “only” 8% in 2009, double the best years for the United States in the last decade. An editorial in the New York Times on October 27th urged China “to pick up some of the slack: selling more of its own goods at home and buying more from the rest of the world.” In other words, play the same role in helping the rest of the world recover as the United States did after 1997. Beijing, however, has no intention of sacrificing its own interests to help countries it sees as both commercial and geopolitical rivals.
Over the summer, the Chinese central bank put an end to its short-lived policy of allowing its currency, the yuan, to gradually appreciate against the dollar, a policy aimed at reducing inflation without raising the price of Chinese exports to the point where they lost their competitive advantage. Beijing was never going sacrifice its trade position. All the “talks” pursued by Washington to persuade Beijing to cease manipulating its currency so as to reduce its massive trade surplus with the U.S. were doomed from the start.
Beijing uses a host of other mercantile tactics to gain an edge in the global trade war. Last week, the Chinese government announced that it would increase its rebates on taxes charged to exporters – giving them a further boost. China, like most countries (except the U.S.), uses value-added taxes (VAT) on domestic production. The VAT is rebated on exports and applied to imports, acting both as a subsidy and a protective tariff for domestic industry. Washington has pushed for negotiations at the World Trade Organization (WTO) to change the way VAT affects trade, but foreign governments are not going to give up an advantage in the American market just to be kind.
China also uses direct subsidies at both the national and local level to support industrial development. In a communication forwarded to the WTO's Subsidies Committee October 23rd, the United States complained, “As we have highlighted in prior submissions to this Committee, provincial and local authorities in China play an important role in implementing industrial policy, including with regard to subsidization, and therefore the absence of information on sub-central government subsidy programs is particularly troubling, the United States.” But such diplomatic submissions will not change Beijing’s behavior. The battle for markets, both at home and abroad, will intensify in a troubled world economy, and Beijing will play to win.
The New York Times editorial argued, “trying to capture a bigger share of shrinking markets in the United States, Europe and Japan — just as they tip into recession — won’t provide China much of an economic lift. What it will do is contribute to the slowdown in the rest of the world by hogging demand. China would get much more bang for the buck if it focused on stimulating its own domestic markets for goods and services.”
But these are not either/or choices. China, like many other countries, will learn from the current turmoil that domestic markets are the ones that need to be expanded and protected as the basis for national growth, prosperity and strength. However, if foreign markets are still open, why not grab as much of them as possible too? To be forced out of a market is one thing, but no sane competitor is going to surrender a market voluntarily just to be nice.
It is the United States that needs to heed the advice to rebuild its domestic economy. America will have to work its way out of its present predicament, since no society can live beyond its own ability to produce. The attempt to do so through consumer, government and trade deficits is what caused the financial bubble that has now burst. It is time to create wealth and generate income in America again; expand industry, boost farming for both food and fuel, rebuild infrastructure, and produce more energy by every means feasible. Invest here, build here and work here. That is how America became the world’s largest economy, and how it created the material base for its global leadership.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in defense and trade issues. E-mail him at HawkinsUSA@aol.com.
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