TRADE AND THE ECONOMY: by Colin TeeseNews Weekly
How important is trade for Australia?
, December 2, 2000
Colin Teece looks at Australia's place in the world, as a trading nation
Is world trade growing? Most certainly yes, and much faster than GDP. An index of trade growth beginning at 100 in 1990 had reached 185 by 1999. GDP growth over the same period moved from 100 to 120.
How much of that growth can be attributed to the free trade push which attached itself to globalisation and the so-called Washington consensus? We don't really know because accurately measuring the source of the gains is impossible. But we do know who are the big winners.
In 1999, 54% of exports were held by the United States and the European Union. Figures are not instantly at hand for Japan, but we know their share of world exports is significant, so we may conclude that the rest of the world does not have much.
The figures underline what many of us have concluded instinctively: that the US and the Europeans (along with Japan) have been the big beneficiaries of free trade growth in the last ten years.
And while the Europeans and Japan are among the most reluctant to open their markets, they are making real headway in the US market.
Now nobody achieves this unless the US wants them to. The US has always used access to its market as an instrument of economic policy - some might add, as a driving force of economic imperialism.
But previously it was in circumstances where lesser governments had not given up so much of their power over domestic policy to the vagaries of the market.
During the Cold War, for example, generous access to the US market was afforded the Japanese. That access, more than all other factors combined, enabled Japan to achieve what the world acclaimed as its "economic miracle".
Now that same sort of access advantage to the US market is being used to keep Europe and Japan within the Washington Consensus, though their instincts probably lead them to prefer a more interventionist form of capitalism. In shorthand terms, the Washington Consensus stands for the kind of unrestrained free market capitalism the US would prefer the world to practise.
But there is another dimension to the compact which seems to have grown up between the big three economic powers. The US realises that its prosperity, as much as world's, now depends upon the Europe and Japan generating dollar export surpluses in their trade with the US.
Here's why. Obviously those exports are sustaining growth in the European and Japanese economies which feeds the rest of the world. No less important those same export surpluses are being re-invested in the US and, thereby, are effectively underwriting US domestic economic growth and share price levels. And they are funding the US current account deficit, which, relatively speaking, is of a similar magnitude to our own.
Why are the Japanese and Europeans willing to use their US dollar surpluses to fund US debt? Because, in a booming US economy, interest rates and share prices are more attractive there than at home.
And the strength of the US dollar makes the United States a safer and more attractive place to invest. And incidentally, an understanding of all of this immediately gives meaning to existing currency and interest rate alignments.
But with wage push inflation fuelled by the US domestic boom eating into company profits, US share prices can be expected to fall and, in their wake, surely will follow a downturn in US economic activity. Such a downturn would almost certainly trigger a series of unmanageable flow-ons.
For a start, lower US demand for European and Japanese imports could quickly translate itself into a worldwide slump from which recovery might be painfully long and slow. Even more so if it is accompanied by a sell-out, on the part of Europe and Japan, of US debt.
Over-exposed as Australia is, by design, to the fullest vagaries of the world economy, we could not expect to be shielded from any adverse consequences of these developments for our trade and economic growth prospects. And we can't turn to the World Trade Organisation, and its rules, for comfort.
Or blame the US. Like it or not, the US is, and must be, more than ever before, the command economy for contemporary capitalism.
And every time it must make a domestic economic correction shock waves reverberate around the world. We have, after all, seen that happen before.
This time it may be worse, especially for countries like Australia, whose Government has chosen to surrender most of its economic policy making powers to the free play of market forces.
So what can be done? Nothing - except wait and hope that those in Washington, Brussels and Tokyo can make it all go away. Meanwhile the incumbent Australian Government had better prepare itself to deal with the political fall-out.