Arming for a trade war?

Arming for a trade war?

From deep within the offices of economists, traders and think tanks around the world, a faint but familiar sound is heard. Amid the muted grumbling and huffing, you'll catch snatches of terse conversation echoing around the corridors containing phrases like "currency manipulation",  "global re-balancing" and even "trade war".

At government level, the subject also occasionally breaks out into the open,  as at the G20 meetings in Pittsburgh and, more recently, the IMF/World Bank meetings in Istanbul. But here the message is much more diplomatic, and can be summarised thus: "the world needs a new framework for strong and balanced global growth".

It sounds reasonable enough doesn't it?  But not in Beijing, where the message translates as something far less benign.

For Beijing, "balance" is really code for "paying down the US trade deficit", and what the West really seems to be saying is "We need China to help us pay for this mess by letting the yuan appreciate. We're really not that concerned about whether it all results in higher unemployment over there, so long as US consumers can maintain their living standards."

The whole mechanism of the currency tango and where it's heading is eloquently decribed here, but not surprisingly, Beijing's financial leaders apparently have no intention of jeopardising the domestic economy to sort out what they consider to be the mistakes of the US.

Meanwhile, as the dollar continues to depreciate, the other Asian nations that also rely on exports are getting increasingly jittery, and have begun taking their own action.

So who, if anyone, will blink first, and if no one does, what then?

Well, if China won't co-operate in making its own exports more expensive, then maybe Washington will do the job for it. And that brings us back to the rumblings about trade wars. We've already had action against Chinese tyres; now there's this talk of tariffs on Chinese steel and steel tubes.

Of course, trade skirmishes are part and parcel of economic activity, and this is not the first time this debate has emerged. This is, however, the first time the debate has taken place within this particular combination of economic circumstances.