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Geithner's Last Laugh

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By David M. Smick
Tuesday, June 9, 2009

Tim Geithner can't seem to catch a break. Our Treasury secretary was at Beijing University last week to assure the Chinese that their dollar investments were safe. The audience broke into laughter.

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The Chinese should be wary of such hubris. While America's public finances are troubling, to say the least, Beijing and the rest of the world should examine the future for economies, including China's, that have become overwhelmingly dependent on exports. Their future looks as problematic as the future of the debt-ridden United States.

As ugly as the credit markets have been, trade has been worse. Since World War II, global trade has grown twice as fast as gross domestic product. But things have shifted with the downturn. For starters, the exports of the world's three biggest exporters -- Germany, Japan and China -- are 33 percent lower than they were a year ago. With American imports down by roughly the same amount, two-way trade has contracted by $1.5 trillion. There are real questions as to whether this development is more than a temporary pullback and will evolve into a quiet shift toward a new era of deglobalization.

Those in that snickering Chinese audience should consider that, on paper, the United States looks relatively immune to this trade collapse. American exports are 11 percent of GDP, according to the World Bank. Compare this to the exports-to-GDP ratios, for example, of China (42 percent), South Korea (46 percent), Germany (47 percent) and Thailand (73 percent).

Policymakers from these economies need to ask themselves: What happens if the U.S. consumer -- the world's consumer of last resort -- pulls back permanently, as seems distinctly possible?

True, these countries are scrambling to stimulate domestic consumption. This will be tough, though, given their aging demographics almost across the board (as people age, they save more and consume less). In China, with no social security system or much in the way of a safety net of governmental services, families save 50 percent of their income.

In Germany, policymakers have gone out of their way to limit consumption and reduce wage gains as a means of dramatically improving the economy's global competitiveness. Yet with global demand for German capital goods waning, Germany is in trouble with serious industrial overcapacity even as consumption remains modest. The Germans' secret hope? That the U.S. consumer locomotive starts moving again at full speed.

Beijing boasts of its big stimulus package. Yet the government's efforts to stimulate domestic consumption appear to be not much more than a large subsidized lending operation, a stimulus that is unlikely to be sustainable. A lot of the stimulus was supposed to derive from spending by regional and local governments that never materialized. Moreover, transforming China into a consumer economy to compensate for lost exports will take years. Meanwhile, Beijing, too, secretly hopes the U.S. consumer will quickly come to the rescue.

The world may be waiting longer than it expects. The United States may be undergoing a subtle economic shift. World governments should listen carefully to President Obama, a leader with an uncanny ability to make activist, even radical, proposals sound benign. At the Group of 20 summit in London, for instance, Obama said that the United States cannot be the world's consumer. On the surface, this sounds like a statement about the temporary condition of the business cycle.

Actually, Obama was talking about something far more significant -- not outright Smoot-Hawley-style protectionism but a coming policy of small tax, spending and regulatory changes that will encourage this quiet trend toward deglobalization. Like it or not, this shift reflects a growing Washington mind-set that globalization has gone too far. Witness the Buy American provisions on Capitol Hill. Obama is playing not only to his union supporters but also to a segment of the U.S. corporate community whose enthusiasm for the global supply chain and "just-in-time" inventory management is waning.

And the coming rise in shipping costs has the potential to turbocharge this deglobalization process. The U.N. agreement last October on sulfur-burning levels for ships (not to mention California's own restrictions on ship emissions) are expected to send shipping costs skyrocketing. A decade from now, it may be profitable to send by sea only items with relatively high value to weight, such as laptops. Analyst Philip Verleger argues that the net result could well be that a lot of low-wage jobs that moved to China, India and other emerging markets will move back to the West. This is already happening in the furniture industry.

But here's the punch line: A capital-dependent America can't decouple from the world, or we will face the danger of our own hubris. America needs the world's capital as much as the world needs American consumers -- an economic situation tantamount to a policy of mutually assured destruction. True, the global system needs rebalancing. But until that happens, all parties need to limit the public lectures and snickering, and think seriously about how to achieve a permanent worldwide recovery despite serious headwinds.

David M. Smick is a global financial strategist and the author, most recently, of "The World Is Curved: Hidden Dangers to the Global Economy."



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