WASHINGTON – The U.S. and China could be on the verge of an explosive trade war that could damage an already shaky global economy, says a top financial analyst.
Stephen Roach, chief economist at Morgan Stanley, blamed the threat primarily on political leaders in the United States who had failed to rein in the deficit and American consumers who spent more than they earned.
“The risk of protectionism will rise largely because the Bush administration refuses to accept responsibility for pushing down U.S. savings,” Roach said. “Through reckless fiscal policies, there are early signs Asia and China are prepared for the likelihood that trade tension could accelerate due to actions largely taken in Washington.”
Roach said Beijing should watch the U.S. Congress carefully for hints of new protectionist legislation.
“That is an early sign for Asia in general, and you in China in particular, to prepare for the likelihood that trade frictions could intensify, in large part because of actions taking place in Washington rather than in Beijing,” he said. “Japan was the scapegoat in the 1980s. China is at the top of the list of being a scapegoat today.”
The biggest problem is America’s rising current account deficit, which had ballooned to 5.7 percent of gross domestic product in the middle of this year, from 4.5 percent last year. To pay for the flow of imported cars, refrigerators and other goods, America has relied on foreign purchases of dollar-denominated assets, providing capital for consumption in the U.S.
But those purchases are drying up. Eventually, as foreign countries continue to buy fewer U.S. assets, the dollar will fall, explains Roach.
Roach said he expected the dollar to lose 10 percent to 15 percent in value over time. However, because many Asian countries have fixed exchange rates, they would resist the pull to devalue their currencies because of concerns that exports would actually decline.
As a result, the value of the yuan would increasingly be part of a debate on trade issues between Beijing and Washington, Roach said.
“America must fix its budget deficit, but there are also adjustments required of Asia, and those would include more flexible currency policies, and that would certainly include China,” he said.
Roach, on a visit to China, had high praise for Beijing’s economy, saying the risk of overheating had fallen dramatically since the central bank raised interest rates.
For the three months to September, China’s economy grew 9.1 percent compared with a year earlier, after recording 9.8 percent in the first quarter and 9.6 percent in the second.
Real estate has been pointed out as one of the key areas of concern in the Chinese economy, but Roach said he had not detected a nationwide property bubble outside the country’s largest city Shanghai.
