Commentary
Michael Pettis
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Source: Getty
In The Media
Retaliation is Likely
If countries with large trade surpluses weaken their currency, countries with large trade deficits are likely to retaliate through reciprocal currency manipulation or trade tariffs.
Published on Sep 26, 2010
Source: The Economist
And we know how that game ends. In 1930, following France’s very successful 1928 devaluation and Britain’s tightening of trade conditions within the Commonwealth, the world’s leading trade-surplus nation passed the Smoot-Hawley tariffs in a transparent attempt to gain a greater share of dwindling global demand. This would have been a great strategy for the US had no one noticed or retaliated, but of course the rest of world certainly noticed, and all Smoot-Hawley did was accelerate a collapse in global trade which, not surprisingly, hurt trade surplus countries like the US most.
We seem to be following the same path, and in a beggar-thy-neighbor world any country that does not participate in retaliatory policies will suffer. The only question is which retaliatory policy. I suspect that countries that can intervene in the currency and manipulate domestic interest rates will select those polices as the most efficient way of intervening in trade. Countries that cannot will almost certainly resort to trade tariffs. And it is probably too late for global policy coordination to make much of a difference. It would be very difficult for policy coordination to limit all the many ways countries can and do cheat, and in the end the trade-deficit countries will probably find it easier to retaliate openly and directly. And why not? Diversified countries with large trade-deficits have most of the best cards in any trade dispute. Simple game theory suggests that a sub-optimal result is almost inevitable absent a policeman to bully participants into good behaviour.
About the Author
Michael Pettis
Nonresident Senior Fellow, Carnegie China
Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
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Recent Work
Carnegie India does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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