Saturday, January 31, 2009

China Likes Germany Now

Because another European leader (Sarkozy) has met with a certain Monk from India since Angela Merkel last met with him, Germany is no longer getting the could shoulder from China. In fact, Merkel and Wen Jiaobao seem to have become fast friends recently.

Perhaps this is because, as the world's two largest economies that are running trade surpluses, China and Germany are beginning to feel a little heat from the likes of the U.S., Britain and Spain who have the deficits that support those surpluses.

According to Merkel:
China and Germany have similar interests because both depend strongly on exports and believe protectionism is not the answer (to the financial crisis)

Well, duh!

The question is, what are these two countries doing to reduce their excess export capacities so that other countries are less likely to resort to protectionist measures?

If I read Michael Pettis correctly, China and Germany have plenty of reason to concerned about protectionism -- all the more reason for these two countries to do everything they can to stimulate domestic demand.

China appears to be making great efforts to boost domestic auto consumption thus far, and while they should be commended, this particular measure doesn't take much pressure off G7 countries running trade deficits with China. China's auto exports go mainly to
Africa, Latin America, the Middle East and Russia (which is already starting to raise protectionist barriers).

On the one hand, maybe China need not be worried about protectionism since WTO rules prohibit most obvious forms of protectionism. On the other hand, the WTO investigation process can take up to two years -- plenty of time for protectionism to have a devastating effect on the world economy. And anyway, despite China and the U.S. adhering to WTO rulings thus far, I wonder whether either country may later decide to turn its back on the WTO if the global recession becomes longer and deeper. Any thoughts?