Deglobalisation - a money problem not a political or ideological one?
One of the joys of the Financial Times is the extraordinary breadth of readership revealed in its letters page, and the depth of knowledge that emanates from it as a result. Referring to the current poly-crisis we find ourselves in, Professor Emiliano Brancaccio et al raise a critical point in their joint letter of 17th February (Link - FT Letters) about the deregulation of the global economic system being the cause of the world’s current ills, rather than politics or an ideological ‘clash of civilisations’.
In their view, “One of the worst faults of the present system is the imbalance in economic relations inherited from the era of free-market globalisation. We refer to international net positions, where the US, the UK and various other western countries have large external debts, while China, other eastern countries, and to some extent Russia are in an external credit position.” The result of these trade imbalances has been a rising trend towards protectionism, onshoring and ‘friend-shoring’.
While Trump’s trade war with China might be seen as the starting bell - and his presidency clearly elevated the issue - the first moves actually happened under President Obama with respect to car and truck tyre imports from China in 20091. The timing of the Obama decision reveals a lot - this is after the global financial crisis, with world trade having peaked a few years earlier and the global economy still mired in recession. Something had clearly already gone wrong by 2009.
What are the ‘international net positions’ Professor Brancaccio and friends are talking about? They are referring to the balance of payments (BoP) - a country’s imports and exports divided into a current account (goods, services, net investment returns) and a capital account (financial instruments, central-bank balances). The important thing to note is that while on an international level these balances have to net to zero, individual countries run current account and capital account surpluses and deficits which in turn need to net to zero.
The problem highlighted in the FT letter is one of permanent imbalances. Certain countries (China for example) run constant current-account surpluses and others (like the US) run corresponding current-account deficits. Since it gained World Trade Organisation (WTO) membership in 2000, China has run an export-based economy and has arguably kept its industries subsidised and its currency weak to help this, making its exports to the US seem cheap.
But there are also reasons to be found in China’s domestic economy for these permanent imbalances. China has a high savings rate and a high domestic investment rate but very poor levels of household consumption (55% of GDP vs 82% in the US in 2021 for example). When not being invested in ghost cities and bridges-to-nowhere, Chinese savings are recycled abroad, often into the US capital account in the form of US Treasury bonds and shares. This is really a matter of China’s internal rebalancing, an ongoing but generally-unsuccessful process in the past decade and more.
The focus here though is money and not trade or domestic policy. the ‘imbalances in economic relations’ referred to in the FT letter above probably refer to both money and trade, but the authors are a little coy in not highlighting the difference.
One can deduce though that since the authors are talking about the problems resulting from trade and globalisation (the product of free trade agreements such as the General Agreement on Trade and Tariffs or GATT and its successors), that the money system is the real focus, or at least it should be. The problem with talking about the money system is that it means taking a view on the dollar, and that is kind of polarising these days - to the extent no one really wants to talk about it in polite company. But the dollar as the global reserve currency had a starting point, and for that we have to delve back into history to 1944 and the Bretton Woods agreement.
The aim of the Bretton Woods conference in July 1944 was to formulate a post-war global monetary and trade settlement. The problems at hand were ensuring currency stability, promoting post-war trade and rebuilding the global economy. Yet the US had another agenda - finally supplanting the UK as the dominant global economic and financial power, and to do this, the dollar would have to take centre stage, dethroning the pound sterling.
Given its dominant role in the fighting and its financing, it was perhaps not surprising that the US plan won out at Bretton Woods. The plan’s architect, Harry Dexter White, was a firm believer in the need to use gold to back currencies, and his plan was similar in form to the gold-exchange standard of the inter-war years. Currencies would be pegged to the dollar, and the dollar in turn would be pegged to gold at $35 per ounce, the pre-war level.
With America triumphant in the war, richer than in 1941 and the world’s great creditor, one could see White’s faith in his plan. But there was a flaw which would be exposed in the future. Unlike the gold standard where bullion would flow out of a country if it ran a current-account deficit, under a gold-exchange standard, dollars flowed out. These dollars would ultimately find their way back into the US banking system as deposits, increasing credit in the system where the gold standard would have ensured a counter-cyclical reduction in credit.
To make the dollar a world reserve currency, the US had to run trade deficits to allow foreigners to get hold of dollars, and these in turn would increase the stock of dollars relative to the US holding of gold, straining the dollar/gold peg in the long run. This is the so-called Triffin dilemma. It would be events in the 1960s - President Johnson’s great society spending programme, the Vietnam war and arguably the UK devaluation in 1967 which finally prompted foreign countries to start redeeming dollars for gold, and the $35 peg was finally broken in August 1971 by President Nixon. The so-called ‘Nixon shock’ resulted in currencies floating against one another as they generally do today.
The other protagonist at Bretton Woods in 1944, Britain’s Lord Keynes, had a different plan, one which unsurprisingly was would have helped Britain after the war far more than America, but it is instructive with respect to our current global issues. Keynes came up with the idea for a global currency called the bancor (bank gold in French) which was a sort of ‘use it or lose it’ system whereby pressure would be put on the creditor countries to reduce their surpluses as well as on the debtor countries to devalue and reduce their deficits, the latter being a trend which had exacerbated protectionism and international ill-will during the inter war years, the era of ‘beggar-thy-neighbour’ policies2.
The bancor system involved pegged currencies (including a peg to gold) and an intricate system of devaluation and appreciation for debtor and creditor nations respectively to adjust imbalances. Critically, it was an international currency for trade settlement rather than a single country’s domestic currency (ie the dollar), and Keynes hoped to bypass the tendency of nations to want to compete with one another unfairly through currency devaluation and tariffs while also taking the pressure of debtor countries who couldn’t devalue enough to make their exports competitive on world markets (for this read the UK in 1945).
The bancor system was novel in the sense that for the first time (including the gold standard), creditor nations could be pressurised into appreciating their currencies or reforming their domestic economic policy to increase consumption and imports, thereby rebalancing the international trade system in a controlled way. This would seem like a pretty good answer to the world’s current imbalances, but first you have to get everyone to buy into the idea of a world currency which isn’t the dollar…or the yuan for that matter.
The problems caused by trade imbalances have always raised American hackles, even with the dollar as the world’s reserve currency and the source of what Valéry D’Estaing called America’s ‘exorbitant privilege’ of cheap financing. The film version of Michael Crichton’s ‘Rising Sun’ premiered in 1993, well after the Japanese financial bubble had popped, but anti-Japanese sentiment still riddles the film, especially with the characterisation of Japanese corporations hoovering-up US real estate (those Japanese trade surpluses being recycled into the US capital account).
Japan was constantly being accused by the US of sharp practice with respect to trade and currency manipulation to help their US exports, and not without some justification3. For 1993 and Japan, roll the clock forward to 2023 and China as the focus of US trade wrath. Part of the trade war can be seen in the momentum towards reshoring and autarky, not just in the US and China but also in Europe, with initiatives to improve self-sufficiency in critical materials and industries.
The authors of the FT letter are spot on about trade imbalances poisoning international relations, and call for a ‘new international economic policy initiative’ to head off the threat of future wars. Sadly events seem to be heading in the opposite direction.
The confiscation of Russia’s foreign currency reserves after its invasion of the Ukraine last February and the apparent moves in response by Russia and other BRICS countries to form an alternative but separate trade-settlement system speaks of bifurcation not the coming-together that happened at Bretton Woods in 1944. The century-old problem of finding a working replacement for the gold standard is raising its head once again. When it comes down to it, it’s about money, not trade or ideology, and that is what makes the problem so intractable.
Jennifer Loven, Obama imposes tariffs on Chinese tires, NBC News, 12/09/2009
Benn Steil, The Battle of Bretton Woods, Princeton University Press, 2013, pp143-5
Richard A. Werner, Princes of the Yen, Quantum publishers, 2018 pp35-7.