Fears of all-out global trade war

Local economists are sceptical about the likelihood of substantial resolutions being taken at the G20 meeting in Seoul, failing which some have even suggested the possibility of an all-out trade war.

High on the agenda is the financial health of the globe, particularly in the wake of more quantitative easing (QE2) in the United States and its impact on developing countries.

The US announced it would pump $600-billion into its economy by buying government bonds. The resulting flood of additional money into capital markets in the developed world is likely to see investors turning to developing countries where interest rates are better.

This hunt for yield has significantly strengthened developing market currencies, including the rand, adversely affecting manufacturers and exporters in developing countries.

Another manifestation of these global shifts has been the rocketing gold price as investors flee to bullion and away from the weakening dollar.

Robert Zoellick, the president of the World Bank, suggested a possible return to a modified version of the gold standard in an editorial in the Financial Times. This saw gold prices leap to highs of over $1 400 an ounce.

Pravin Gordhan, the South African finance minister, was deeply critical of the US move and said its decision was counter to the “spirit of multilateral cooperation that G20 leaders have fought so hard to maintain during the current crisis”.

It was also counter to undertakings at a recent G20 meeting, also in South Korea, of finance ministers and central bank governors, at which countries undertook to “move towards more market-determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies”, Gordhan said.

Dawie Roodt, the chief economist for the Efficient Group, said a concrete outcome from the G20 was unlikely.

Instead, what could result was a “good old-fashioned trade war”—where countries took unilateral steps to protects their own interests, whether it be competitive devaluation of currencies or increased trade protection measures.

The decision by the US was such an example—it was nothing more than a bid to devalue the dollar, he said.

A recent report by Global Trade Alert, which monitors state measures on trade in the wake of the global crisis, noted that, although G20 countries had continued to introduce trade protection measures, an all-out trade war had so far been averted.

The question is what South Africa can do to shore itself up against global market phenomena, which are manifested in things such as a strong rand.

The Reserve Bank and treasury are already committed to measures to ease rand strength, including building up foreign currency reserves and relaxing foreign exchange controls, to cushion local manufacturers and exporters.

Cutting interest rates aggressively could have an impact on the strengthening rand but it comes with risks, say private sector economists, who are largely sceptical about South Africa’s ability to affect the rand’s continued rise significantly.

A drop in short-term interest rates, namely the repo and prime rates, could be followed by rates on the bond market, which would make South Africa less attractive to investors, Roodt said. But he warned that this could have knock-on effects, such as over-borrowing by South Africans.

Annabel Bishop of Investec said that a 1% cut in interest rates in November and another 1% cut in January could cool the rand.

“The risk is that the rand could depreciate if the yield differential is no longer there, and once it starts depreciating, it could run significantly weaker, particularly if there is a rise in global risk-aversion levels.

“This is one of the reasons the SARB [South African Reserve Bank] tends to move by 50 basis point (0,5%) cuts each time, so as not to surprise the markets as described above.”

Adrian Saville of Cannon Asset Management said that there was simply very little South Africa could do to manage the currency.

Also, he said, arguments for a weaker rand were born out of a misconception that South Africa’s competitiveness, specifically in the manufacturing sector, was related to the strength, or rather the weakness, of the rand.

According to his research, released earlier this year, South Africa’s manufacturing performance was more closely related to growth rates in the G7 countries.

He said that if South African businesses wanted to compete on the basis of price they needed to accept that the country had a relatively small, open economy, which was vulnerable to currency fluctuations. “But competing on the basis of price is a race to the bottom,” he said. Invariably competitors from other countries would always emerge who could supply goods for less.

South Africa should rather attempt to compete on the basis of quality, Saville said. “We need to define ourselves as iconic competitors, we need to produce unique, hard-to-replicate products.” But for this to happen, greater efficiencies had to be introduced into the system, such as greater labour productivity, improved skills in the work force, as well as improving ease with which people could do business, Saville said.

For instance, many sectors in the country were dominated by large oligopolies or monopolies, which made starting new businesses difficult.

Ultimately, however, little could be done until global economic fundamentals were corrected, he said, and the extent to which the G20 meeting could address these was unclear.



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