The Export Crisis

The belief in free trade is almost religious in nature.  Mainstream economists have consistently argued that free trade benefits everyone.  This is in spite of the fact that the United States developed as it did under protectionist policies, as did post-war Germany, Japan and China among others.  Perhaps these countries would have developed farther and faster had they developed free trade policies earlier, but there are reasons to believe this is not the case.  The theory may be correct that, in the long run, the law of comparative advantages takes hold and generates greater wealth.  The problem is that the ‘long run” is an unknown quantity, and that the economic and political clocks run at different speeds. A human being lives the biblical three score and ten give or take.  He begins to work at let’s say age 21 and he ends his working life at age 65.  He works for 44 years in this model.  The modern work force is not fungible.  A skilled steel worker cannot readily drill for oil. Consequently, when a sector loses its competitive advantage, a worker is let go who frequently cannot transfer laterally to another trade.  Imagine this happening at the age of 45, which happens fairly frequently. He may never again earn the kind of living he once had.  Even if the theory is correct, it deals with aggregate national wealth, not those of each sector.  The total wealth may increase dramatically, but a very large number of voters are actually badly hurt by the changes.  The result is major political instability and blocking free trade.  Simply, the time it takes for wealth to accumulate and flow through society may be incompatible with the life cycle of citizens. But there is a second problem, one that we are experiencing now.  Exporters need customers.  The inability of customers to buy the exporter’s goods creates a crisis in the exporter’s economy and polity, making the exporter hostage to the appetite of the importer. Countries that are dependent on exports shift from being efficient and competitive, to having an economic system that is being undermined.  And this is the crisis we are in today—a crisis of exporters. The crisis began in 2008 when the European and American economies experienced what was in many ways a normal financial crisis and economies contracted.  The United States emerged at a slower growth rate than before.  Europe never truly emerged.  As a result, American and European appetites for imported goods did not expand as expected. China, the most efficient exporter at the time, was pushed into a crisis it never recovered from.  The flywheel of the Chinese economy was increasing exports generating cash flow, stabilizing the banking system and fueling domestic growth. When the Americans and Europeans contracted consumption, China destabilized.  China’s goal was to maintain full employment, and to do that it leant money to businesses that were inefficient.   Lending money to inefficient businesses created inflation which made Chinese goods more expensive than, for example, Mexican goods.  China went into a downward spiral from which it has still not recovered. The world of industrial minerals existed in a fantasy that China would grow forever and the price of oil or iron ore would remain extremely high. It wasn’t understood that China was in its “new normal” because its fate was in the hands of its customers, and its customers couldn’t buy at previous levels. When it finally penetrated the markets’ consciousness that China would not return to its prior industrial growth pattern the price of minerals plunged.  This extended the crisis to oil exporters like Russia and Saudi Arabia. Economic crises frequently turned into political crises.  Just as free trade creates instability in countries, even as it generates in the long run higher aggregate wealth, so too the contraction of exports creates not only sectors of the economy that are disproportionately effected, but a more general crisis of government budgets that compounds the political crisis. Today we are in a crisis of exporters, where at each link of the supply chain the ultimate disinterest in increasing imports, particularly by Europe, backs up the system and destabilizes it. Most at risk were last generation’s top exporters.  Least at risk are inefficient exporters.  For example, China, South Korea, Russia and Saudi Arabia are at risk. Germany, who exports almost 50 percent of its GDP, will I think, be shortly in trouble.  The United States who has always been inefficient as an exporter, and exports only 13 percent of its GDP, nearly 40 percent to Mexico or Canada, is least effected. This sort of crisis has not been seen since World War II with the triumph of free trade. We have seen the instabilities in free trade from poor exporters, and from sectors destroyed by free trade, but we are now in a generalized crisis of exporters.  That crisis, like Smoot-Hawley, has the possibility of creating massive political instability.  It already has.   About the author: George Friedman is an internationally recognized geopolitical forecaster and New York Times best-selling author. He is the Founder and Chairman of Geopolitical Futures (www.geopoliticalfutures.com), an online publication dedicated to examining and forecasting the course of global events, and former Chairman of the intelligence firm Stratfor.