Now, the U.S. will remain the largest consumer market, and we are going to make sure that it's open. One of the principles that we very clearly affirmed in London was that protectionism is not the answer. It's not the Germans' fault that they make good products that the United States wants to buy. And we want to make sure that we're making good products that Germans want to buy. But if you look overall, there is probably going to need to be a rebalancing of who's spending, who's saving, what are the overall trade patterns.
For the most part, the warnings held, and major economies held off from imposing major tariffs. Yet the danger, as framed by Martin Wolf a year ago (Jan. 6, 2009), is a prolonged one, with the pressure to protect national markets increasing over time:
Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.Now comes Nobel Laureate Paul Krugman, ringing in the New Year by demanding...our demand back.
Krugman argues today that the Chinese refusal to let its currency appreciate -- a problem we have lived with for a long time -- is beggar-thy-neighbor protectionism; the Chinese trade surplus protected by that policy "drains much- needed demand away from a depressed world economy." Two days after the U.S. slapped duties on Chinese steel pipes, Krugman calls for a bit of trade war brinkmanship:
The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I’d urge China’s government to reconsider its stubbornness. Otherwise, the very mild protectionism it’s currently complaining about will be the start of something much bigger.
His economic justification (drawing uncharacteristically on elder economist authority) is a kind of mirror image of Wolf's warning. Under pressure, countries with trade deficits will inevitably -- and rightly -- "want their demand back":
Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full ... all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.
Again, Krugman pushes Obama from the left. It will be interesting to see how Obama calibrates the pressure on China in the New Year.