Trade frictions may rub Euroland the wrong way

THE IMBALANCES are growing and danger signs flashing. No, I don't mean ours: despite the latest figures the UK will have ended the year with something close to a current-account balance. Much more worrying is the triangular relationship between the US, Japan and continental Europe.

The past few days have seen increasing concern about the widening current account imbalance between the US and Japan. Although this tension has been evident for years, the mood has become more ill-tempered. The US deputy trade representative was refused a meeting with Japan's deputy finance minister, who was "too busy" to see him. In itself that means very little - meetings like that rarely produce any worthwhile progress - but it shows that the mutual irritation and even incomprehension between the two countries has ratcheted up a few notches.

The reason? The current account gap has also ratcheted up in recent months. This week it was revealed that Japan's exports were down in 1998 on 1997 - but those to the US were up. Meanwhile Japanese imports (including those from the US) were dramatically down.

More about the implications of that in a moment. Less prominent on the financial community radar, but a strong political story, has been the banana war between the US and Europe. Unless you live in one of the banana- producing countries, this is more a symbolic issue. But the much more important trade issue is the enormous current account surplus of the euro zone.

Until now the current account surplus of Euroland (or Eurolande in French) has attracted hardly any notice. We have yet to think of the region as one entity and look at figures in that way. This is not surprising: there are no official balance of payments statistics for Euroland, as the figures are still published in national accounts. So anyone who looked at these figures could see that France and Italy had large current account surpluses and that Germany was in modest deficit. But people tended not to bother to pull the figures together and see what implications there might be, for example, for the value of the euro.

Now, following the sharp fall in the dollar since last autumn, and particularly since the launch of the euro, the markets' focus has shifted. Current account imbalances are not just causes of rumbling political discontent, although they remain that. They have become sources of market concern.

This has fed back to the US administration, which to judge by the remarks of Larry Summers, the deputy treasury secretary, is seriously concerned. While the US economy cantered on and investors flooded to the dollar, it was possible to argue that the current account imbalance was as much a symbol of the attractiveness of US business as a sign of weakness. The big capital account surplus, the symbol of US excellence, was more important than the current account deficit.

That argument was valid until last year. Then, as the graph on the left shows, the current account deficit suddenly lurched further into the red. It is now nearly 3 per cent of GDP, close to its worst level of the late 1980s. The US still attracts inward investment, but the pile-up of debt in foreign hands has meant that for the first time since the Second World War, the US is running a deficit on interest, profit and dividends as well as on merchandise trade. It is, so to speak, borrowing to pay the interest on earlier borrowings. Quite suddenly, the US faces a situation where its debts could whiz out of control.

That has not happened yet. While foreigners are prepared to hold dollars, it can carry on for a long time running a deficit. What would you hold, after all - dollars or the Brazilian real? The turmoil in the rest of the world has enhanced the status of the dollar as a safe haven.

The value is underpinned by purchasing power parities (PPP). Measured by these, the dollar is not overvalued against the leading European currencies or the Japanese yen. Sterling, on a PPP basis, "ought" to be about $1.45, according to new calculations by Citicorp - not the $1.65 it has been for many months. Nor would anyone wish on the US the position of Japan, where domestic demand is plunging, people are frightened for their jobs and the authorities seem powerless.

Nevertheless, at some stage the long American boom will peter out, and if the experience of previous cycles is any guide, the dollar will weaken sharply. The danger is that it may weaken too sharply, and that all the latent protectionism will emerge. As the US points out, it is not reasonable to expect the US to be the buyer of last resort for the rest of the world's goods.

How will this affect Europe? In some ways Euroland seems a worse offender than Japan, for as a percentage of GDP its current account surplus is larger (see right-hand graph). It too suffers from a deficiency in domestic demand. The German and French recoveries have been largely driven by exports - in fact, one of the big concerns in Germany is that the export boom is ending and that this will pull back growth this year.

It is not hard to see trade relations between Europe and the US becoming as tense as those between Japan and the US. The UK is not an offender at all: we are not members of Euroland and are roughly in current account balance. But we will get swept up in the tension, for we are part of the EU trading bloc.

The problem, looking ahead, is to see quite how a rumbling discontent might turn into something that actually damages the world's open trading economy. It is absolutely clear that the US cannot drag along the rest of the world for much longer, but it is hard to see the circumstances and timing of the end of the long boom.

When American growth does slacken, it is desperately important that both Euroland and Japan have managed to crank up domestic demand. If they have done so, the world economy muddles through a moderately difficult period from 2000 to perhaps 2004. But if their economies remain more or less stagnant, and the US economy falters, then things do become more worrying.

News
people
Arts and Entertainment
Lena Dunham
booksLena Dunham's memoirs - written at the age of 28 - are honest to the point of making you squirm
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvDownton Abbey review: It's six months since we last caught up with the Crawley clan
Sport
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
PROMOTED VIDEO
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
News
Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
people
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
Sport
premier league
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Sport
Mario Balotelli celebrates his first Liverpool goal
premier leagueLiverpool striker expressed his opinion about the 5-3 thriller with Leicester - then this happened
News
ebooksAn unforgettable anthology of contemporary reportage
News
Britain's shadow chancellor Ed Balls (L) challenges reporter Rob Merrick for the ball during the Labour Party versus the media soccer match,
peopleReporter left bleeding after tackle from shadow Chancellor in annual political football match
Arts and Entertainment
Female fans want more explicit male sex in Game of Thrones, George R R Martin says
tvSpoiler warning: Star of George RR Martin's hit series says viewers have 'not seen the last' of him/her
News
i100
News
i100
Sport
Plenty to ponder: Amir Khan has had repeated problems with US immigration because of his Muslim faith and now American television may shun him
boxing
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments