THE ECONOMY
All quiet on the Western Front in the great trade war
JOCK BRUCE-GARDYNE
Afortnight is, as we know, a very long time in politics. A fortnight ago the twilight weeks of peace in 1914 seemed an appropriate analogy for our present dis- contents. Mobilisation for the Great Trade War with Japan was proceeding apace, while the dollar appeared to be heading over the precipice and into free fall. Nobody — not even the participants really believed that the brave words from the finance ministers and central bankers meeting in Washington about the approp- riateness of existing exchange rates would suffice to calm the currency markets. Yet this weekend the scene is more reminiscent of a different war: the phoney war of 1939, When after the false alarm of the air raid sirens on the first day of war there followed months of bulletins about skirmishes be- tween patrols across the Rhine, while the evacuees drifted swiftly back to London and the other cities from whence they had come, and life went on almost as though the hostilities had never been declared.
President Reagan has duly imposed 100 per cent duties on American consumers of Japanese computers, television sets and DIY equipment, and the European Com- munity promises to follow his example at the first sign of diversion of these desirable artefacts to European markets. The Japanese have shaken their heads in disbe- lief and complained to the administrators of the General Agreement on Tariffs and Trade. Our own Government continues to threaten to do unspeakable things to Japanese finance houses seeking to operate from London (like driving them off to Dublin, no doubt, since Mr Charles Haughey has unveiled his plans to demons- trate that a bankrupt economy is no bar to the establishment of a brand new interna- tional financial centre) unless Schroders, Barings and Kleinworts are promptly offered desks in the Tokyo Stock Ex- change, and Cable & Wireless is satisfied about its access to the Japanese telecom- munications network. The Americans' trade return for February turned out, at $15 billion, to be fully as bad as the Pessimists had predicted. But the circula- tion of a rumour that the figure was going to be $18 billion sufficed, however illogi- cally, to reassure the markets, and the fear of being caught short by co-ordinated central bank intervention on the eve of the long Easter weekend had the dollar bears scuttling for cover. The expectation of a defensive rise in US interest rates receded. All was — more or less — quiet on the Western Front.
Yet the rhetoric remains as belligerent as it hypocritical. President Reagan affirms that 'the health and vitality of the US semi-conductor industry are essential to America's future. . . . We cannot allow it to be jeopardised by unfair trading prac- tices.' Trading p.actices, that is, such as Japan's alleged failure to observe the spirit of last year's bilateral pact by which the Japanese were to desist from selling micro- chips in the States at prices the local manufacturers could not match, and'to use their best offices to enable the American manufacturers to acquire a substantial slice of Japan's domestic micro-chip market. A good, old-fashioned cartel agreement, in other words, and one which has already provoked howls of rage from American users of microchips and a formal complaint to Gatt from the European Commission about induced artificial increases in com- ponent prices for Europe's electronic in- dustry (while it simultaneously pursues complaints of Japanese chip dumping, to demonstrate its evenhandedness). 'Unfair trading practices', as Humpty Dumpty almost said, 'mean just what I choose them to mean — neither more nor less.' Or as our own Foreign Secretary explained in Chicago the other day, taxing Japanese goods is not protection. On the contrary, taxing Japanese goods is a form of liber- alisation, since it's done to make them desist from taxing ours. Stands to reason.
Sir Geoffrey said something else in Chicago which made for interesting read- ing. His rockets were not all aimed at Tokyo. He also had some stern words for his hosts. The world, he told them, had watched with mounting dismay as sky-high US interest rates had put the world eco- nomy at risk. Now there was a time, not so long ago, when interest rates were sup- posed to be determined in each country by domestic monetary conditions. Hence UK rates ran up to 17 per cent, while American interest rates soared into the 20s. And the hyper-inflation of the 1970s duly re- sponded to treatment. It is marvellous how a change of portfolio changes perceptions.
Nor was Sir Geoffrey the only one to have rates of interest on his mind. Once again at the Washington IMF meeting the Germans and the Japanese were subjected to extensive lectures about the impropriety of their interest rates. A fraction of those prevailing in Washington and London, maybe: but scandalously high. So the world has turned full circle. Our statesmen have blessedly short memories. Nine years ago, at the 'economic summit' in Bonn, the Japanese were subjected to remarkably similar lectures about the level of their interest rates and the tightness of their monetary policies. On that occasion they did as they were told. The yen promptly shrank in value, and Japanese exporters had a field day. Is that really what we want to see repeated?
So perhaps there is a silver lining to the trade war. For if they are to be barred from selling goods abroad the Japanese are surely rather unlikely to go on Pumping funds into the US bond market to enable the Americans to buy their goods, and watching their investments depreciate in value with the dollar. They will pay astro- nomic prices for stocks and shares in Tokyo and pretty pictures of sunflowers by Van Gogh in London, instead. In retro- spect the wave of protectionism, so long threatened and now breaking upon us, may be seen to have materialised just as the adjustment in currency values is achieving the correction in trading patterns which protectionism is supposed to enforce. There would be nothing surprising about that. Generals always fight the previous war. Only the longer we can keep it at the phoney stage, the better for all concerned.
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