Global Trends by Martin Khor

Tuesday, 22 September 2009

Big week ahead for global affairs

This week’s UN General Assembly and G20 Summit will see President Obama basking in the limelight, but a shadow has also been cast by his latest trade protectionist measure

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This will be a very active week for international affairs.  On Tuesday a world summit on climate change will be held at the United Nations, organized by the Secretary General Ban Ki-Moon.

It will mark the debut of United States President Barrack Obama at the UN.  Leaders from dozens of other countries will also be there, and they will stay on for the annual General Assembly meeting.

Obama will undoubtedly be the star.  He will also address the UN Security Council on the issue of disarmament.  He is expected to announce the United States’ new commitment to multilateralism and particularly to the United Nations.

This is bound to be warmly welcomed, as it would mark the end of the era of his predecessor George W. Bush who showed a disdain for the UN in general and contempt for multilateralism in security matters in particular, as witness his launching of the war on Iraq without authorization of the Security Council.

Later in the week, Obama will also chair the Group of 20 summit in Pittsburg.  This meeting will discuss the global economic crisis, including regulation of financial institutions, reform of the global financial system, and counter-recession economic policies.

Expectations that the summit will produce decisive action have been reduced in recent weeks.  This is mainly because the global financial system that had been on the brink of collapse when the first G20 summit was held in Washington last November has since recovered, due to the bail-outs of bankrupt banks and the pumping of liquidity into the system.

Moreover, the crisis in the “real economy”, in terms of loss of GNP growth and the rapid fall in trade, seems to have eased.   The need for world leaders to prod one another to take counter-recession measures, especially expanding government spending through “fiscal stimulus”, was acute when the G20 met in London earlier this year.

That need has receded as signs of the “green shoots of recovery” emerged.   However, there is also a new orthodoxy that these green shoots, especially the rapid recovery of the stock markets, are misleading and that there will likely be a double-dip recession. 

Once the effects of the large injection of government spending wear off, the economy will decline again, according to this thinking.

There could of course then be further injections of public expenditure, in a kind of Fiscal Stimulus II.   But the voices warning about the dangers of the ballooning of government deficits, and of the building of a new bubble that one day will burst into a new crisis, are becoming louder. 

There will in other words be a limit to how much fiscal stimulus and monetary easing the governments can do or be allowed by public opinion to do.  And if the economy does not take off sufficiently under its own steam because of the first emergency measures, it may dip again, and at that time the same measures may not be available at the same strength.

There is now a debate on “exit strategy,” or when and how much the governments should claw back from their extraordinary spending and bail-outs.  Some leaders and experts believe the exit should start now, or soon.  Others tend towards continuing the actions for some time, to avoid the danger of the economy falling again.

These differences in policy preferences are likely to be present at the G20 summit.  It will probably produce popular measures (like curbing the bonuses of leading bank officials) and new regulations (such as tighter capital requirements for banks) but no fundamental systemic reform              

The summit may also urge countries to continue to take expansionary economic measures, but temper this by warning against excessive actions and mention the need for exit strategies.

One area for more heated discussion will be the rise of trade protectionism.  It is here that President Obama will take a lot of heat.  Two weeks ago he authorized slapping a 35% tariff on tires imported from China, which stands to lose US$1 billion in annual tire exports.

Obama has been roundly criticized by leaders and newspapers worldwide for this move.

The President is seen as pandering to his domestic constituency, namely the steelworkers’ union, which he needs to please to garner support for his domestic agenda, particularly getting health-care reform passed in Congress.

The protectionist move sent shock waves around the world.  There are claims and counter claims.  The US claims that 5,000 jobs have been lost due to the rapid increase in tire imports from China.  On the other hand, China’s rubber industry association predicted that 100,000 jobs will be lost in China due to the new tariff.

The US administration claims that its action (slapping tariffs of 35% for a year, to be slightly reduced in the following two years) is allowed under the terms of China’s accession to the WTO, under which countries can take safeguard measures if Chinese imports grow rapidly and damage local production.

China however views the US move as highly protectionist and against WTO rules.  It is challenging the US action in the WTO.

Coming after a “Buy American” clause in the US fiscal stimulus package, and a trade-protection chapter in a climate change bill recently adopted by the House of Representatives, this latest US measure against Chinese tires has built Obama a reputation for being a trade protectionist.

He will thus be on the defensive on this score during this week of high international diplomacy.