The trade trap

The year will be hazardous for the world economy — in part, needlessly so. One kind of risk, admittedly is probably unavoidable, and anyhow not susceptible to ordinary economic policy. This is the danger that America’s slow expansion will fade or stall, owing to lack of business and consumer confidence. But the larger hazard is one for which governments can claim all the credit: the risk that the current system of international trade negotiations, and with it the broader trade regime that has supported global prosperity these past 50 years, will collapse.

America’s expansion has been hesitant, and growth elsewhere in the rich world tepid at best, because the recession that went before was so remarkably tame. The slowdown in the United States was nonetheless mild because of what didn’t happen next: consumers didn’t panic. Mostly, they kept borrowing and spending, and the fearsome recession that might otherwise have happened never came. That was fine while it lasted. But the debts of America’s imperturbable consumers continue to hang over the world economy. This fact, and its various manifestations — America’s burgeoning current-account deficit, instability in currency markets and the country’s awesome appetite for foreign capital, to name just three — will sooner or later make themselves felt. If a sudden consumption slump in America turns out to align with bad economic news on one or two other fronts, the result would be grim. It would not be the first time stock-markets got their forecasts wrong.

Can the odds of success be improved? Consumer confidence, still the critical factor in all this, is a law unto itself. Governments cannot hope to drive it directly. But they can affect the context in helpful ways. In America the most useful step would be a plan to reduce government borrowing over the medium term, or even some sign, absent thus far, that the Bush administration cares a hoot about its colossal long-germ budget deficit. Europe and Japan, meanwhile, must still do more to spur demand, mainly by keeping their monetary policies loose, and more to improve their productivity, mainly through regulatory reform. However, the last thing the world needs at such a delicate juncture is the unforced error of a breakdown in the global trading system. As far for developing countries, their anger at rich-country hypocrisy (fall for free trade, then exempt your own farmers) is both genuine and justified. The breach is real. America is already exploring what it sees as a more productive avenue: bilateral free-trade agreements with “can do” developing countries, selected case by case. (Courtesy The Economist)