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Now, more than ever, we need to keep China happy

The engine of economic growth is threatened by the American military's poor map-reading
GOVERNMENTS, like the rest of us, are prey to the law of unforeseen consequences. Unlike the rest of us, however, they carry out large-scale actions - with the result that the consequences may have seismic effects. So it may turn out to be with the war in Kosovo and the future of the World Trade Organisation.

International trade is one of those economic stories about which it is particularly hard to get excited. Only when some particularly absurd example of a trade restriction hits the headlines - like the banana war or the incipient beef war between the US and Europe - do trade issues push themselves upwards from the bottom of the business pages.

The WTO and its predecessor, the GATT, have had much lower profiles than the International Monetary Fund or the World Bank. Yet the gradual freeing of world trade, under the GATT and now the WTO, has been the great engine of post-Second World War prosperity. Even as recently as 1970, world exports were under 5 per cent of world GDP. Now they are more than 25 per cent. Yet this great engine of prosperity is now under threat, and the threat, in some measure, comes from the inability of the US military to use up-to-date maps when carrying out their bombing campaigns.

There have long been tensions in trade relations; it would be astounding if there were not. But the trade tensions between the US and China are particularly corrosive at the moment, and the bombing of the Chinese embassy in Belgrade could hardly have come at a worse time, for five reasons.

First, there is an enormous and growing trade gap between China and the US. China's net exports to the US rose, on American calculations, by 56.9 per cent last year, and the trade deficit with China is second only to that of Japan. Japan, however, is both an ally and a large investor in the US, so that the deficit is tolerated if not welcomed. China is not an ally, as the crowds outside the US embassy in Peking have made clear, and it has not used its trade surplus to make investments in the US, at least not on any significant scale. The US, by contrast, has substantial investments in China, ranging from McDonald's hamburgers to Motorola mobile phones.

Second, there is a row about the succession at the WTO. It currently is leaderless, the previous chap having resigned and cleared off. For many months the members have been deadlocked, unable to agree on a successor. The two contenders are a former prime minister of New Zealand and the Deputy Prime Minister of Thailand. The Americans, supported by Latin America and much of continental Europe (though not the UK) support the New Zealander, while Japan, China and the rest of Asia support the Thai. So the world has lined up on more-or-less geographical lines.

Rationally, the New Zealander, who is called Mike Moore, does seem a more appropriate choice, but the US has been clumsy at pushing its view and has managed to enrage the Asian delegates. Talks are taking place in Tokyo at the moment between the various trade ministers, but do not hold your breath waiting for a successful outcome.

Third, China's application for membership of the WTO has just been blocked by the US. To become a member you have, in theory at least, to operate an open economy. China is not. It has offered concessions - dropping the duty on imported cars from 80-100 per cent to 25 per cent - but these were deemed insufficient by President Clinton, under pressure from Congress.

Until last week it seemed plausible that the talks could reopen and China gain membership later this year. US business, with all its investment in China and its eyes on a market of 1.2 billion people, was preparing to lobby Congress in support of China's bid. Now, while the economic case remains, the politics look a touch more difficult.

Fourth, the US administration has just lost its wisest voice, Treasury Secretary Bob Rubin. Mr Rubin, a former senior partner of Goldman Sachs, has an extraordinary, sinuous, intuitive grasp of currency and trade issues, developed from years on a New York trading floor. He knows how the world economy works. He is also thoughtful, decent and charming. Larry Summers, his deputy and successor, is also extremely intelligent but comes from a somewhat rougher mould. Everyone knew that Bob Rubin had been wanting to resign for months, but that he should go now does raise a slightly touchy question that maybe, like any good market man, he knows when to sell.

Finally, all these concerns come together at a time when the US is the main force sustaining the world economy. Demand in western Europe is creeping upwards, but slowly. Much of eastern Europe is in recession. Bits of East Asia are recovering but Japan remains in recession. The Chinese economy seems quite frail. Latin America is certainly fragile. Meanwhile the US, almost alone, bounds on. But it does so at the cost of a yawning trade deficit, as it sucks up the excess production from the rest of the world.

It is easy to cry wolf. There have been so many supposed trade crises in the post-war world. Enough, at least, has been patched up to maintain the general progress towards a more liberal world economy, and the world economy has delivered higher standards to the majority. The areas where living standards have fallen, for example in Russia and in much of Africa, have been hampered by the economic policies of Communist and Marxist regimes, and the aftermath of these.

But the bicycle needs to maintain its forward momentum if it is to remain in balance. In particular, the big players of world trade - the US, Europe, Japan and China - need to keep pedalling. The US and Europe are quarrelling, Japan has dire internal problems and now the fastest-growing trade relationship in the world - that between China and the US - is threatened.

My guess is that eventually the US and China will kiss and make up. It is so overwhelmingly in the self-interest of both sides to have a healthy trading relationship (which means the US increasing its exports to China), that the ructions will eventually be pushed aside. Score that an 80 per cent probability.

Now consider the 20 per cent possibility: that a full-scale trade war will erupt between China and the US, or even worse that the whole progress towards a more liberal world economy, which has lasted now for more than two generations, will be reversed. That is a horrifying thought, uncomfortable even at 5 to 1 odds against.