Stephen King: A US 'trade axis of cheats' is blowing multilateralism an ill wind

'Bilateral trade positions are of use only to those who want political capital'

"You're with us or against us." President Bush's now-famous remark may have been directed specifically at the war against terror, but the message is beginning to percolate through a variety of other policy channels. "Do as we would like you to do," appears to be the message, "or accept the consequences."

Perhaps you can't blame the most powerful of imperial powers for taking this view. This philosophy, though, carries implications across a broad range of policy areas, one of which is international economic relations.

It is interesting that the US administration has given up on the "strong dollar" policy and appears to be encouraging the dollar to decline. No real comment on the impact on the rest of the world, just a broad belief that a weaker dollar would be in America's best interests.

It is also interesting that over the past three years the US has berated other areas of the world for failing to get their economies in order, yet has seemingly forgotten about its own role in allowing the global asset bubble to develop in the late 1990s.

And it is interesting that, as US manufacturing jobs continue to be lost, the US Congress starts to look for a scapegoat: the war on terror may have given us the axis of evil but the war on "unfair" trade practices is likely to give us the axis of cheats.

At this point, politics and economics become blurred. The easy political solution can often be one that doesn't make a lot of economic sense. Take the loss of US manufacturing jobs (left-hand chart). These job losses have been particularly intense over the past three years, a period in which China has continued to grow at an extraordinarily rapid rate. Add to this the fact that the US has a growing trade deficit and, strikingly, a growing trade deficit with China alone (right-hand chart), and it becomes relatively easy to put two and two together, come up with 5.8 and blame China for America's manufacturing woes.

A simple answer, perhaps, but not necessarily the right one. American manufacturing jobs may have disappeared but at least some of the fault - if that's the right word - must lie with American companies themselves, which have taken advantage of highly mobile capital to shift sources of production to areas where labour costs are low.

If you think capitalism is the right model, this is an inevitable process. The only domestic policy issue is to ensure that there is enough flexibility within the home labour market - whether in the US, Europe or elsewhere - so that workers previously employed within manufacturing can find another job. Whether they end up as burger flippers or computer programmers will then depend on the quality of, and accessibility to, a decent level of education.

What about the trade position itself? Surely the growth of the bilateral imbalance between the US and China proves that there's all sorts of cheating going on? I am going to make a bold assertion: on their own, bilateral trade positions tell us nothing about the competitive relationship between countries and, therefore, are of use only to those who want to make political capital, irrespective of economic rights and wrongs.

Start off with a world where the US does no trade at all with China. Let's say, for the sake of simplicity, that all its trade in Asia takes place with South Korea. Then assume that the Koreans calculate that their electronics output can be assembled more cheaply in China.

The Koreans still produce the various components needed to make the electronics goods, but these components are shipped to China for assembly and packaging. They are then shipped to the US. Overall result? The US is no longer importing electronics goods from South Korea, so its bilateral trade position with South Korea improves.

South Korea is now exporting electronics components to China, so Korea's bilateral trade position with China improves. China, though, is now exporting electronics goods to the US, implying that the bilateral trade position between the two superpowers has improved from China's point of view but deteriorated from America's.

If you chose to focus purely on the bilateral position, you could make a lot of political capital out of this. No decent jobs growth in the US? Blame the Chinese. Unfair exchange rates? Blame the Chinese. Destruction of manufacturing industry? Blame the Chinese. Easy political points, perhaps, but, without any substantiating evidence, completely wrong.

The relocation of production, design, assembly, packaging and shipping around the world tell us a lot about the comparative advantage of different countries when it comes to a multinational's global assembly line, but the bilateral trade imbalances that come as part and parcel of this assembly line really should have no relevance at all: they may simply be a symptom of a more favourable allocation of resources. Those that seek to question these bilateral imbalances may be throwing a protectionist spanner in the works.

The domestic political perspective can too often be at variance with the multilateral perspective required to think about international relations. The danger today is that multilateralism is being pushed to one side to make way for a series of possibly inconsistent, unilateral positions.

Take the G7 finance ministers' communiqué, released on 20 September. It said: "We emphasise that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms."

A multilateral approach would identify not just those exchange rates that might be out of line but, importantly, would require each country or region to adjust domestic policy to ensure a better global outcome. This communiqué falls a long way short: we know that finance ministers would like to see some kind of exchange rate adjustment but, beyond that, nothing.

The problem is simply that everyone, unilaterally, can make a case for a weak domestic currency. The Americans need jobs, so the dollar needs to come down. The Chinese need to shift workers out of agriculture into manufacturing, so the renminbi cannot be allowed to rise.

The Japanese are still confronting their deflationary demons and do not want to see a stronger yen choking off a nascent recovery. The eurozone is weak and, for the sake of its domestic industries, should not accept a unilaterally stronger euro, even if this might keep the US, China and Japan happy.

Unilateral arguments are all very well for appeasing domestic political opinion, but they're all take and no give. They tend to make things worse, not better. We need greater global cooperation, with full recognition of mutual interdependence. But we are in danger of an international blame culture, with partial opinions obscuring universal truths.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com