As the global recession deepens, the news around the world shows how drastic the pullback hits trade between nations. The two poster children for this are China and Japan as their economies are primarily centered around exports.
For the second month in a row, Japan posted a trade deficit of Y223.4 billion in November, compared with a surplus of Y784.4 billion a year earlier. October had a deficit of Y67.7 billion. The November deficit was an all time record and the Bank of Japan stated that exports continue to fall substantially in their Tan Kan report. The central bank on Friday cut rates and downgraded their assessment of the economy.
China reduced their interest rates by 27 basis points and cut reserve ratios by 50 basis point for their banks. This is the fifth time in three months and comes on top of a $600 billion stimulus program that was recently announced. The State Council has pledged to increase money supply for 2009 by 17% to aid the economy as well. China experienced a surprise 2.2% drop in exports and an 18% drop in imports last month as the credit crisis and global recession bit hard. The drop in exports was the first decline in seven years as manufacturing contracted by a record amount. As an example of this contraction, Japan's Uniden Corp. (wireless communications) announced it was cutting 6,200 jobs in China and Zhang Ping, China's top economic planner, warned last month of the risk of "massive unemployment" according to Bloomberg.
- China Cuts Interest Rates, Fifth Time Since Sept
Further exacerbating the trade woes, banks are making trade finance less available and more expensive (higher rates and fees) as they continue to remain stingy with credit. According the WSJ, the cost of dollar-denominated credit lines has risen 45% for some companies. The World Bank estimates that trade will contract in 2009 for the first time in 27 years. "In November, Pascal Lamy, head of the World Trade Organization, convened a meeting of senior government officials to discuss the problem. Some financing sources had frozen altogether, and after the private meeting, Mr. Lamy estimated that demand was outstripping supply by some $25 billion." Clearly, things have deteriorated since then.
Contrary to whatever pledged at the big meeting last month, countries around the globe are erecting trade barriers to protect domestic industries. Not surprising, this includes the United States as the White House provides $17.4 billion in bailout money for the domestic auto industry and foreign competitors are decrying it as an unfair government subsidy.
The Washington Post reports that "Indonesia is slapping restrictions on at least 500 products this month, demanding special licenses and new fees on imports. Russia is hiking tariffs on imported cars, poultry and pork. France is launching a state fund to protect French companies from foreign takeovers. Officials in Argentina and Brazil are seeking to raise tariffs on products from imported wine and textiles to leather goods and peaches..." Xinhua news agency reports that, "China will use tariffs and trade policies "to facilitate exports of labor-intensive and core technology-supported industries, and encourage domestic companies to conduct overseas mergers and acquisitions," according to and Information Technology minister Li Yizhong.
While I don't envision a return to Smoot-Hawley tariff act of the 1930's, the global trade policy has set sail for protectionism. The forms may be more opaque and less direct, but their impacts will be the same: worsening the outlook for global growth. Let's watch to see if and when competitive currency devaluations start to creep into the picture.
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Andrew Busch
