Cooperation breakdown risk

This is my comment from this week’s Fund Strategy.

No doubt the G20 summit of world leaders in Pittsburgh will come out with a pious declaration about the need for international cooperation. Most likely too it will blame the bankers for the economic crisis of the past year. But it will skirt over some of the key tensions that are emerging in the global economy.

On this side of the Atlantic last week we saw a spat between Britain and Germany over the fate of General Motors’ former subsidiaries in Europe. Lord Mandelson asked the European Union to ensure that German subsidies for Opel do not start a “subsidy war”. London fears that such subsidies might convince Magna, the new Canadian owner of the former GM businesses, to sacrifice Vauxhall for the sake of Opel.

Meanwhile, China reacted angrily to Barack Obama’s decision to impose a 35% tariff on the imports of vehicle tyres. Strangely, the president argued that such a tariff would somehow lead to more trade rather than less.

At the G20 summit itself America and Europe are evidently planning to lead a drive to reduce global imbalances. But China, with some justification, seems to be assuming it will come under pressure as a result of this initiative.

These spats point to two competing trends in the global economy. On the one hand, countries benefit from international cooperation. On the other, the economic downturn is intensifying competitive pressures between countries.

Cooperation is immensely beneficial because it strengthens the resilience of the global economy. If one country gets into trouble it can be bailed out by others. International organisations could also play a role in ensuring the global economy runs smoothly.

But the economic downturn puts such cooperation under threat. It increases the pressure on countries to take unilateral action to defend their narrow sectional interests. Such measures, including tariffs and subsidies, threaten retaliation by other parties.

Ultimately the result could be a total breakdown of international relations. In essence that is what happened in the build-up to the second world war. Economic tensions gradually morphed into political and military ones.

Mercifully, the world is a long way from a global war. International cooperation remains broadly intact despite growing tensions around the edges.

But the robustness of such cooperation remains one of the great unanswered questions of the economic downturn.

Despite the earnest statements at forums such as the G20, the world’s leaders are at the same time undermining global cooperation.

Violations of free trade or state subsidies for investment may not be large in themselves but they create a dangerous precedent. If international cooperation cannot be maintained the price will be high.