Interfax-Ukraine reports that The Financial Times has quoted Brazil’s Finance Minister Guido Mantega as saying that the world is on the verge of a full-scale trade war. He thus warns again about the dangers of currency manipulation. Mantega said that Brazil was preparing new moves to prevent further appreciation of the Brazilian real and would raise the issue of exchange rate manipulation at the World Trade Organization (WTO). He said the US and China were among the worst offenders.
“This is a currency war that is turning into a trade war,” Mantega said. His comments follow interventions in currency markets by Brazil, Chile, and Peru and recent sharp rises in the Australian dollar and the Swiss franc amid an exodus of investment from the sluggish economies of the US and Europe.
It will be recalled that Mantega, Brazil’s finance minister since 2006, launched controls on fo-reign portfolio investments in Brazil, aiming to halt an increase of 39 percent in the real against the dollar over the past two years.
The minister said currency manipulation would be on the G20 agenda this year. Brazil would also lobby to have the WTO define exchange-rate manipulation as a form of veiled export subsidy. Any attempt to change WTO rules to incorporate exchange rates would be difficult, however, as China could be expected to veto it.
Meanwhile, George Soros, chairman of Soros Fund Management LLC, also says in his article “The US-China Dialogue of the Deaf” for Project Syndicate that the US-China economic conflict is one of the most alarming global events. “The global imbalances that were at the root at the Crash of 2008 have not been corrected — indeed, some have grown larger,” Soros says, assessing the post-crisis changes. “The US still consumes more than it produces, running a chronic trade deficit. Consumption remains too high, at nearly 70 percent of GDP, compared to an unsustainably low 35.6 percent of GDP in China.
“Households are over-indebted and must save more. The US economy needs higher productivity, but US corporations, which are operating very profitably, are accumulating cash instead of investing it – with quantitative easing aimed at heading off deflation. In China, by contrast, bank lending needs to be reigned in, but regulatory efforts have been hindered by off-balance-sheet financing and the development of an informal quasi-banking sector. The economy is showing signs of over-heating.”
In Soros’ view, these imbalances could be reduced by the US using fiscal rather than monetary stimulus, and China allowing the renminbi to appreciate in an orderly manner. “But domestic politics in both countries stand in the way… Unless a deliberate effort is made by both sides to reach a better understanding, the world faces a turbulent time in 2011 and beyond,” he forecasts.
The Day has asked experts to comment on how the abovementioned challenges can affect Ukraine, on whether we can prepare for them and minimize the negative impact on the national economy, and on the most likely scenarios of trade wars and how to protect ourselves from them.
COMMENTARIES
Yaroslav ZHALILO, president, Center for Anti-Crisis Studies:
“The crisis has really affected international trade policy: many countries have been trying overtly or covertly to restrict access to their markets so that the budget-funded domestic demand stimulation measures result in the enrichment of, not in the outflow of resources from, the country.
“Now that the world is switching from anti-crisis measures as such to post-crisis financial regulation and currency consolidation, the developed countries are expected to be less inclined to resort to protectionism. For a liberalized foreign policy allows engaging market mechanisms in stabilizing the financial situation, including the balance of payments. There may be attempts to put a currency component, i.e., exchange rate manipulations, into trade rivalry. Yet it is hardly possible to ‘play’ for a long time in this sphere. There already are countries, such as the US, which have exhausted their potential in this field.
“For this reason, the current statements of the global financial community, such as the warning of Brazil’s minister of finance, are nothing but an intention to extrapolate the 2009-10 trends on the future.
“I am convinced, though, that there will be a reverse trend, when the world will resort again to trade liberalization. Still, the liberalization level of the global trade system will be somewhat lower than it was before the crisis. New protectionism will assume new shapes and limitations that will be rather hard to overcome. I mean phytosanitary regulations, protection of intellectual property and trademark rights, etc.
“As for Ukraine, it should adequately defend the interests of its exporters, using the experience of many developed countries, where the president, prime minister, and the government as a whole care about the promotion of their producers on foreign markets. Besides, we should not forget about bitter competition on foreign markets. For there is an ever-increasing number of developing countries, especially in Latin America and East Asia, that are actively entering foreign markets. This poses a greater threat to Ukraine than potential trade wars that may restrict access to the markets of developed states.”
Volodymyr STUS, leader, Group of Analysis and Forecasting, Center of Strategic Initiatives:
“The scenario described by Brazil’s Finance Minister Guido Mantega has long been in action. But it is part of a global civilizational process rather than a financial scenario. A trade war is only the beginning. This will be followed by a drastic increase in protectionism and a downfall of the world’s leading currencies (some of them will become ‘wooden,’ as the Soviet ruble once was), the bursting of bubbles, economic blockades and embargoes, and, as a result, a sharp drop in international trade, switching to the raw-material and gold standard. The crisis will no longer be confined to the economy alone.
“And all these phenomena in the national economy will be far more serious than in 2008. At first, this will produce a negative effect but then, if Ukraine does not allow itself to be drawn into global conflicts and sticks to the I-don’t-care principle, the effect may be positive – not in the sense that things will be fine in this country but in the sense that things will be much worse abroad.
“To minimize the risks of a likely global trade war, we should observe political neutrality as much as we can and equally distance ourselves from Russia, the US, and the EU. As for the economy, instead of pinning too many hopes on raw-material and metal exports, we should develop our domestic market, mechanical engineering, agriculture, and small business.
“From the financial angle, we must not restore hard-currency crediting for individuals and we should closely watch the dollar. Like the euro, it is a weak and doomed currency. Ukraine should, whenever and as soon as it is possible, stop keeping its hard-currency reserves in the dollar and the euro.”
