The rising risk of a global trade war

Michael Pettis, whom some of you may remember as head of Bear Stearns Asset Management emerging market debt product and who is now a professor of finance in Peking, warned in today’s FT of the growing risk of a trade war. He fears that if the big exporters like China, Germany and Japan don’t increase imports and consumption, then the trade deficit countries like the US, Spain, Italy and Greece will react with import controls. “Other economies must absorb a large share of the European shock – or the US will be forced into tariffs and import quotas.”

This reminded me of the conversation I had with the CIO of a Boston-based institutional money manager on Friday. He talked about the rising force of “localization,” by which people look after their interests on the local level rather than on a broader one. Also, at a recent talk in Cambridge, MA, Nassim Nicholas Taleb, who focuses on fragility, noted that the most efficient system is not necessarily the most robust. For example, because the power grid in New England is very reliable, no one has emergency generators, so a power cutoff would be far more disruptive here than one in Baghdad, where people and businesses have localized their power supplies.

This increasing local focus makes trade restrictions more attractive because they lead to more robust if less efficient societies.