The G-20. Prelude to a Protectionist War?

Last night I watched the news report on the G-20 Summit in Seoul. I was somewhat shocked by President Obama's suggestion that the big export nations, China and Germany, should impose (voluntary) limits on their exports and purchase more American goods as a way of helping correct the current imbalances in the global balance of payments .

My news source was the main German public station ARD and their focus was on the German response which was a very definite No from Frau Merkel.

I was not surprised by the her response. The Germans didn't play the financial game to the same extent as the Anglo-Saxons (except as the dumb purchasers of toxic structures). Deutsche Bank moved its global investment banking headquarters to London where the regulatory environment, both culturally and legally was much less onerous. In the UK and the US the financial sector as a percent of GNP rose to over 25% effectively crowding out other industries. In conjunction with a conservative approach to the financial industry domestically Germany also resolved to keep its manufacturing base in tact by offering precision engineering at the top end of the market.

Both the US and the UK allowed their manufacturing bases to be eroded following the misguided belief that developed nations could afford to outsource "menial" labour and maintain their high-tech superiority. I say misguided because this new form of mercantilism assumed the under-developed world remain so, just as it presumed that the developed world would continue to dominate the global economy.

The results of this fallacy is in plain view in the rust belt of New York State, Pennsylvania, Ohio, Indiana, Illinois, Michigan continuing on through even to the new high-tech industries including the new comstoke lode of environmentalism. The same desolate landscape is on show in the depressed north of the UK.

So when Mr Obama suggested that the Germans (and the Chinese) should slow down their export machine and that they should import American goods he was admitting (American) policy failure on a number of fronts.

The creation of the modern Consumer Society of America was not predicated on luxury goods but rather two cars in the garage and a chicken in every pot. It was a mass market consumer society where the price point was the trigger-the lower the better.

It was also a society brought up on the notion of the land of plenty and opportunity for all-a cultural concept ingrained in the American psyche for almost 300 years resulting in a service economy seeking instant gratification, on credit.

Times change, markets move.

With the fall of the Soviet Union the US became the only superpower in town. It is strange. We planned for the coming war and how we would win it. We don't appear to have planned for the peace that would follow, and certainly didn't appear to plan for the case where the peace would be achieved without a military war.

So we became an overconfident nation, dependent on a financial sector which in many instances resembled a Ponzi scheme that eventually crashed and burned and had to be bailed out at great expense to the public. On top of an almost nonexistant manufacturing sector which had seen jobs of almost every stripe march out the door to lower-cost producers there was a collapse of confidence sending service sector unemployment soaring so that we now have total unemployment hovering around 10%. But rather than having a rational discussion on the political and economic future of the US we have a domestic political nightmare in which President Obama is cast as a Socialist, one step away from the dreaded communists, and Sarah Palin and the Tea Party are riding into town on the ghost of Joe McCarthy.

Under those circumstances it is somehow fitting that Obama is having to deal with Germany and China. Our victory over Germany set the stage for America's rise to Superpower status and the shift from the arsenal of democracy to the cradle of consumerism. And Mao's victory in China-viewed as America's "loss" at the time- set the stage for the original Joe McCarthy's rise to prominence.

After two terms of "forward leaning" Republican leadership we elected Obama the Communicator. So when President Obama offers economic co-operation as the key to global peace and prosperity-even if that co-operation requires sacrifice by others, it is in keeping with this role looking to negotiate rather then threaten.

But there is a threat. China has subsidised its industries and managed its currency destroying external competition in an attemt to maintain employment social ease at home. Yes there had been understandings between the US and China in terms of the Americans buying Chinese goods and the Chinese buying US Debt. But that was not an agreement made by Obama, and more importantly, the credit crisis has changed the rules.

I think President Obama was genuine in his offer if somewhat naive. I think the next step will be protective tariffs.

I understand it. But I don't like it.