By John Rapley
G20 finance ministers assembled in Moscow at the weekend amid worrying signs that the world economy is headed for yet more trouble.
It's not all bad news out there, mind you. With its housing sector having apparently bottomed, the United States is growing again. Most of the recent economic reports have been moderately positive, and earlier this month, markets cheered the news that the country's trade deficit had narrowed. This would suggest the US could export its way to growth.
Next door to it, the Canadian economy is slowing, and high levels of private debt point to a possible rocky road ahead. Nevertheless, the country's fundamentals remain strong. So as Jamaica navigates its own dire straits, it can at least look to its trading partners to support its own exports.
However, looking further down the road, and further afield, the picture is a bit less pretty. Probing more deeply into those US trade figures, exports aren't actually increasing. Imports are declining. And, in fact, trade figures from elsewhere point to reduced volumes of trade, even in the biggest exporters. For example, China's imports from Australia, which has provided a lot of the minerals powering the Chinese boom, have also been sliding.
Declining trade is a cause for worry. It's always said that the 1929 market crash did not cause the Great Depression. The subsequent trade war did. Countries keen to export their way back to growth slapped tariffs on one another's exports in the hopes of boosting their trade surpluses. The resultant downward spiral in global trade, as countries engaged in tit-for-tat protectionism, sank the world economy.
Fortunately, the global trade environment is a lot more liberal than it was in the 1930s, and the broad direction of trade negotiations points to more, not less, openness. So Jamaica will not find itself frozen out of export markets as it was then.
But the danger is that countries might find other ways to reduce imports while boosting exports. Many developing countries have complained that the rich countries, by pumping money into their economies, have been devaluing their way back to growth. More recently, some G20 countries have complained that Japan's new government has been deliberately pushing down the value of the yen for this very reason.
The fear of a currency war is sufficiently real that it made its way on to the G20 meeting agenda. It's not like there are not enough countries with good reasons to want to grow on the back of their trading partners. If the North American economy is relatively sound, the European one is anything but. Recent data from the European Union show that it is in recession. Meanwhile, the latest sales reports out of Britain raise the possibility that that country could head into an unprecedented triple-dip recession.
Restoring economIC health
In the US, the Obama administration is swimming against the current tide of austerity. In this year's State of the Union address, President Obama made the case for a strong state role in restoring the economy's health. He did this against the backdrop of the impending March 1 sequester. That is the latest deadline for the US to go over its fiscal cliff, set when the US postponed its last deadline at the end of 2012.
Republicans are holding fast to their calls for deep spending cuts. But President Obama seems to believe that with his re-election, he won the political argument. He is offering the Republicans little more in the way of concessions.
If he gets his way, and the US loosens its purse strings in the coming year, it could inject some vigour into the world economy, and lessen tensions over currency policies. We'll all be watching the US closely in the coming weeks, because how it decides to get past its fiscal cliff could now prove telling for the whole world.
John Rapley, a political economist at the University of Cambridge, is currently on a visiting professorship at Queen's University in Canada. Email feedback to firstname.lastname@example.org and email@example.com.