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BY COSTA VAYENAS
One of the oldest misconceptions in the field of economics is that trade has something to do with competition. When talking about competition, we usually mean sports. The year has only just begun, but it is very likely that the supposedly witty comparison (or not?) by Germany's Finance Minister, Wolfgang Schäuble, on 16 March of trade tensions between France and Germany with the rivalry between the soccer teams of Olympique Lyonnais and Bayern Munich will in retrospect be seen as this year's intellectual low point, at least by economists.
Competition supposes a winner and a loser. Long gone are the days when the motto “it’s the taking part that counts” was valid in sports. Now, the mentality in professional sports, given the huge amounts of money involved, is much more about the “winner takes all”. This sort of attitude is also the one that most politicians take when talking about international trade, and how their respective countries should be positioned: “we should be competitive, we should have national champions, we need to fight and survive, and win market share”.
Many German newspapers recently lamented the fact that Germany had lost its title of “Exportweltmeister” to China. What a tragedy! Actually, it is completely ridiculous. How can a country with a population of 80 million really believe that, in the long run, it will export more in absolute terms than a country with a population of 1.4 billion? And who profits from this title anyway? Does the small amount of pride that the average German worker might feel about being part of the team that is exports world champion, really justify 10 years of belt tightening and wage restraint?
In the days of France's King Louis XIV and his Finance and Trade Minister, Jean-Baptiste Colbert, mercantilism, the theory that trade should make a nation and its sovereign rich or richer, at the expenses of rivals, could still be understood. After all, countries with trade surpluses were importing and accumulating gold, which could then be used to buy troops to fight Spain, the Dutch or England, hence ensuring the king's glory.
Now, a trade surplus means that a country extends credit abroad. A trade deficit means that a country gets into debt abroad. So a trade surplus does not generate an influx of gold but just an influx of paper with the promise that the country that gets into debt will repay the principal later (most likely with interest). This is not a very safe perspective. Chinese officials are currently expressing growing concerns about the value and purchasing power of the more than USD 2.3 trillion of foreign exchange reserves that China has accumulated.
Yu Yongding, former member of the monetary policy committee of the Peoples’ Bank of China and now President of China Society of World Economics, recently wrote a very interesting open editorial, in which he stressed that the “value of China’s hard-earned wealth” is “facing a triple whammy: a decline in the US dollar’s purchasing power, a fall in the price of US government securities, and possible inflation in the longer run”. We can only agree with this analysis.
However, that is the price that countries with large trade surpluses ultimately have to pay for their frugality and competitiveness. Trade is not about gold or silver medals, and the so-called winner only takes home paper, whose value is determined by confidence in the debtor's ability to repay.
So if trade is not about winning, why bother? The most profound, beautiful and still counterintuitive insight of economics is that there are gains from trade. Through specialization, through absolute and through comparative advantages, those countries that engage in international trade will be better off than those that do not. Unlike in modern sports, at least in trade it is still the taking part that counts.
Costa Vayenas is Head of Emerging Markets, UBS Wealth Management Research.
