Browse by Tags

Patrick Messerlin , professor of economics at the Institut d' Etudes Politiques de Paris, thinks European leaders are right to look to Asia to build new trade agreements. Trade liberalization, Messerlin says, are the right prescription for Europe's stunted economic growth. But new trade agreements must be with the right partners. And you might be surprised as to which Asian economies Messerlin argues make the right partners for the EU. From Vox : The first question focuses on the ‘growth’ dimension of trade policy. Preferential trade agreements will only be able to boost domestic growth if the economies of the EU’s preferential trade agreements partners fulfil three main conditions. They should be big enough to generate economies of scale and scope capable of having a substantial impact on the EU’s relative prices – changes in relative prices are the source of welfare gains. They should also be well regulated because modern economies are intensive in norms and dominated by services, the efficiency of which depend largely on the quality of the regulatory schemes in place. Finally, they should have a wide network of good-quality preferential trade agreements, capable of offering EU firms opportunities to access the economies already covered by those preferential trade agreements (the ‘hub’ quality) without waiting for longish negotiations with the EU. As Table 1 shows, Japan and Taiwan – apart from the US – are the only economies in the world that meet these three conditions since the EU already has a free trade agreement with South Korea. China (possibly India in the long run, but not Brazil or Russia) may offer better growth opportunities when it comes to size. But, it still scores poorly on regulatory quality, while Japan and Taiwan score better than many EU member states. When it comes to the ‘hub’ criterion, Japan has a wide network of preferential trade agreements in east Asia (a region that EU negotiators are very slow to negotiate with) while Taiwan has massive operations in China which have been recently strengthened by a key preferential trade agreement, making Taiwan a privileged hub with respect to China. The capacity of Japan and Taiwan to meet all three conditions indicates the need for a resolute EU pivot to east Asia – an outcome echoed by general equilibrium calculations (Kawasaki 2011). Read The much-needed EU pivot to east Asia here .

Writing at VoxEU , Simon J Evenett --Professor of International Trade, University of St. Gallen in Switzerland-likens a currency war to a "rash" likely to break out depending on how policy makers respond to a global recession. But does that make currency wars inevitable? Evenett writes: Is it possible to design an economic recovery package that takes account of the lessons of history while doing the least possible harm – even potentially benefiting – foreign trading partners? For sure some won’t like this question, reasoning no doubt as follows: when (not if) monetary easing leads to economic recovery, the associated expansion in corporate and personal spending will increase demand for foreign goods and services – so in the long run everything will be hunky dory for trading partners, even with monetary easing. Still, the question is a good one because if there are plausible alternatives then (a) maybe the currency war was not inevitable or (b) the decisions not to pursue these policy alternatives points to underappreciated causes of the currency war. Taking as given that the effect of monetary easing on the exchange rate will harm, at least in the short run, foreign trading partners, what other complementary measures could have been taken to limit international tensions? One such measure would have been to combine monetary easing with expansionary fiscal policy. To the extent that the latter directly or indirectly (through supply chains, the demand for commodities, parts, and components, and induced private-sector capital formation) increased demand for imports then this would have offset, possibly fully, the impact of any currency depreciation by industrialised countries. Seen in this light, no wonder trading partners were worried that currency devaluations that accompanied austerity measures (restrictive fiscal policy) in industrialised economies further harmed their commercial interests. The adoption of austerity measures from 2010 closed the door on policy measures that could have mitigated the international tensions created by go-it-alone monetary easing by in the industrialised countries. There are other ways to bolster demand for foreign goods and services. Another road not taken in recent years was far-reaching trade and investment reforms, which would have provided a fillip to trade partners harmed by adverse currency movements. It is difficult to see how a package of extensive trade reform and monetary easing could have been received worse by trading partners than what actually came to pass. This is not the place to recount the trials and tribulations of completing the Doha Round, but it is worth noting that the unwillingness to further integrate the world markets has exacerbated today currency war. Read Root causes of currency wars here .

In an effort to fight deflation and get Japan's economy moving, the Bank of Japan announced it is launching two policies: a 2 percent inflation target and an easing policy similar to the Federal Reserve's quantitative easing approach. Japan Prime Minister Shinzo Abe had been pushing for bold policy, and he called the BOJ's announcement "epoch-making." But investors may not agree--at least as of today. Wall Street Journal Asia Markets Editor Jake Lee says people were "expecting even more" from the BOJ:

Given the climate in Washington, it is difficult to imagine economic policy not being held hostage by politics. But in a new commentary at Project Syndicate , Mohamed El-Erian (who looks himself to be engaging more in the political scene ) argues that for some countries, 2013 will be a year in which economics drive politics: The economic impact of politics in the US, while important, will be less dynamic: absent a more cooperative Congress, politics will mute policy responses rather than fuel greater activism. Continued congressional polarization would maintain policy uncertainty, confound debt and deficit negotiations, and impede economic growth. From stymieing medium-term fiscal reforms to delaying needed overhauls of the labor and housing markets, congressional dysfunction would keep US economic performance below its capacity; over time, it would also eat away at potential output. In other countries, the causal direction will run primarily from economics to politics. In Egypt and Greece, for example, rising poverty, high unemployment, and financial turmoil could place governments under pressure. Popular frustration may not wait for the ballot box. Instead, hard times could fuel civil unrest, threatening their governments’ legitimacy, credibility, and effectiveness – and with no obvious alternatives that could ensure rapid economic recovery and rising living standards. In China, the credibility of the incoming leadership will depend in large part on whether the economy can consolidate its soft landing. Specifically, any prolonged period of sub-7% growth could encourage opposition and dissent – not only in the countryside, but also in urban centers. Then there is Germany, which holds the key to the integrity and unity of the eurozone. So far, Chancellor Angela Merkel has been largely successful in insulating the German economy from the turmoil elsewhere in Europe. Unemployment has remained remarkably low and confidence relatively high. And, while growth has moderated recently, Germany remains one of Europe’s best-performing economies – and not just its paymaster. Read The Political Economy of 2013 here .

Earlier today the OECD released a new report on growth prospects for the global economy, and for OECD member countries. The report projects the global economy to grow at a rate of roughly 3% per year. Emerging economies will continue to see much more rapid growth than developed economies. And that will usher in a significant shift in the balance of economic power over the next fifty years. The report makes this clear by showing how much smaller the U.S., Europe, and Japan shares of the global GDP will be in the coming years: Read the full report here , and watch this summary of the OECD findings:

There is little doubt at this point that an extended recession in Europe would impair economic growth in the U.S., but Silvio Contessi and Li Li of the Federal Reserve Bank of St. Louis argue that the impact of European struggles on U.S. exports may not be as bad as some predict. Yes, the EU is a key purchaser of U.S. goods. But other nations are becoming more critical to U.S. export growth: Li and Contessi: The EU is the largest individual importer of U.S. goods and services, but only about 26 percent of total U.S. exports in 2011 were to the EU. Total U.S. exports represent a 13 percent share of U.S. GDP, but exports to the EU represented only 3.49 percent of that total and 0.4 percent of U.S. GDP growth in 2011. What’s more, none of the euro area countries that are currently burdened with sovereign debt crises are major importers of U.S. goods and services. Thus, a potential slowdown in U.S. exports to these countries would have little impact overall. So, which trading partners are fueling the strong U.S. export growth? Luckily, trade openness between the United States and emerging countries is paying off: Fast-growing emerging markets (e.g., China and Brazil) are buying more and more U.S. goods and services. The volume of U.S. exports of goods and services to China was $130 billion in 2011; its share of total U.S. exports, 7.32 percent, was four times larger than in 2000. Notably, the United States runs a trade surplus in services that helps counterbalance the trade deficit in goods. Read Get by with a Little Help from My…Other Exports here .

Writing in the May/June issue of The American Interest , Barry Eichengreen argues that while the role of the dollar on the global economic stage is likely to diminish somewhat, it will be some time before we see any significant drop in the greenback's importance. But he uses recent currency maneuverings in China and Japan to outline some of the benefits we in the US receive from the dollar being the global currency. With international business being conducted in dollars, U.S. banks aren't burdened with a lot of the exchange rate machinations that banks elsewhere deal with. And the U.S. Treasury costs of borrowing are lessened by the stability that the dollar offers. And on the political front, Eichengreen points to " America’s unique ability to provide dollars in unlimited quantities, but also to withhold them, provides U.S. foreign policymakers with another pressure point to push." But Eichengreen points out that there are some downsides to the dollar being the global currency. By U.S. Treasury estimates, China holds some $1.1 trillion in U.S. government bonds. Total official foreign holdings exceed $3.2 trillion, nearly a third of the $10 trillion of U.S. Treasury debt held by the public. It is worth noting that these official figures are almost certainly underestimates. In addition to purchases in the United States, which are tracked by the U.S. Treasury, governments and central banks can purchase U.S. Treasury bonds through intermediaries in foreign centers like London, where they are harder to detect. Foreign central banks also hold the securities of government-sponsored agencies like Freddie Mac and Fannie Mae, although they have trimmed those holdings since the subprime crisis. If by purchasing U.S. Treasury bonds foreign central banks can lower U.S. interest rates by as much as a full percentage point, then they could, by curtailing those purchases, presumably raise U.S. rates by a corresponding amount. The U.S. housing market and construction sector would feel the pain. This would be a not-so-subtle way for China to make known its displeasure with U.S. policy toward North Korea or Iran, or with a U.S. Treasury decision to label China a currency manipulator. The benefits that America derives from Chinese purchases of U.S. debt are a factor in the State Department’s reluctance to push Beijing harder on human rights issues and the Treasury Department’s reluctance to push it harder on the exchange rate issue. In principle, China could go further and sell its previous purchases. Given the magnitude of its holdings, this would cause bond prices to crater and U.S. interest rates to spike. Smaller bond market shocks than that have caused financial mayhem in the United States. Consider the 1.5 percent rise in thirty-year Treasury yields that occurred in 1994 when Japanese investors faced with a financial crisis at home sold off their U.S. holdings. The result was serious losses and fears of insolvency of major financial companies and hedge funds. If the Chinese wished to wreak havoc in U.S. financial markets, this would be the way. The deterrent to China’s doing so is that it might also be wreaking havoc in its own markets. When institutional investors in Japan sold off some of their U.S. treasuries in 1994, driving down the price, they suffered losses on their remaining holdings. This heightened concern about the solvency of not just U.S. financial firms but Japanese financial institutions as well. China would face an analogous problem. Eichengreen goes on to outline reasons such behavior would create problems for China's economy, so no need to get alarmist. The article as a whole raises a series of interesting discussion points on the impact of the dollar's global status on the U.S. economy and business. Read The Once and Future Dollar here . (Hat tip, Greg Mankiw )

Many of Japan's top business and policy leaders have been expressing their belief that Japan is on pace for a strong recovery from the Fukushima disaster of a year ago. In an interview earlier today with Bloomberg Television , Richard Koo --chief economist for Nomura , and a past member of Japan's Federal Reserve--pointed to a couple of key factors behind his optimism for the future of Japan's economy. But the key factor seems to be the resilience and "cohesion" of the Japanese people. Watch the video via the Washington Post, here .