Daniel Lacalle

G-20: Beware of Protectionism and Devaluation

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This article was published in El Confidencial on February 2013 and in The Commentator.

“Protectionism Teaches us to do to ourselves in time of peace what enemies seek to do to us in time of war”. Henry George.

The G-20 summit this weekend was fun. Like the famous Shaggy song “It Wasn’t Me”, everyone denied any currency war or protectionism. However, concerns about rising intervention are not irrelevant when economies are shrinking, as data showed in Germany, France or Italy, or in exhaustion, as we saw with industrial production in Brazil or Mexico.

Who are the first victims of currency wars? … Exports, which were supposed to get the Eurozone out of the crisis, fell to the lowest levels of the last five months in December (-1.6%). Germany -3.4% month-on-month, France, -1.7%, Italy and Spain, flat.

“I do not hear anything but devaluation, distrust and interventionism.” These are words of a former Citadel colleague who lives in Moscow and was invited to the G-20 meeting. “Nobody trusts anyone. All countries want others to stop intervening, but to keep doing it themselves.”

I have doubts about the much trumpeted “free trade” agreement between the US and the EU announced by Obama. Why?.

  • Because what is hidden under the headline is bilateral protectionism , and the other governments of the world, where our exports and the energy we consume come from, will not easily agree.
  • Because it impoverishes developing countries, who are the future of such exports. Ruining your customers is never a good policy.
  • Because history has shown that bilateral agreements between interventionist administrations never bear fruit because both parties want the same; realities for me, promises to you. The Obama administration and the European Union have quadrupled their trade restrictive measures during the past seven years, and the two sides need the weakness of the other to cover the hole of de-industrialization that we discussed here. A hole that was created precisely because of interventionist and restrictive measures, but governments refuse to admit it.

Citizens are frightened by the crisis and put too much faith in obese and incompetent governments to fix things quickly.

We are protectionism at home, defend our acquired privileges and want to export our way out of the crisis selling to the same countries that we weaken with restrictions (“protect at home, stay open abroad“, as the World Trade Organization warned). We want to be China, but with US salaries and privileges. And that does not work.

According to the Nielsen institute, 40% of the European population defends actions to restrict imports from abroad. We all know how this race ends, but scared citizens demand the same mistakes of the past. Competitive devaluations, protectionism, mutual accusations … Back to 1930.

This masks the problem of countries that are losing competitiveness as the weight of the state absorbs more than 50% of the economy and as a result, debt soars. It is no coincidence that the most indebted and with highest government spending “demand” that their model is financed for free, but remember that “everyone wants to live at the expense of the state, but hey forget that the state lives at the expense of everyone”, as Bastiat said.

Instead of understanding that we create structures that consume more than they produce, and whose marginal productivity worsens, we seek to protect the “welfare of the State”, not the welfare state. Direct to 1930 with the applause of the people, but without the people .As predicted, the conclusions of the G-20 were that there is no currency war and countries should not put up barriers to world trade. And on Monday everyone is back home again trying to devalue and restrict.

Protectionism is denying reality
A highly productive economy survives and thrives in globalization. Winners sell even in protectionist countries. Do you see high-tech companies and high added value sectors, not dependent on subsidies and the state, worry about restrictions in some countries? No. Unfortunately we ignore high added-value and are determined to get the last drop of blood out of an obsolete global industrial model.

If all states want to fight to defend their share of the crumbs making cheap cars, aluminium plates, bricks, grinders or plastic tubes, the race is toward zero. They never win. It masks the reality, but governments then create more and more committees to regulate.

Trying to protect declining industries and sectors makes it impossible for developing countries to grow. We are so arrogant and greedy adding debt and devaluing, or subsidizing farmers not to produce, that we let inflation and poverty sink our neighbours. Then we send some NGOs to study the problem.

But yes, sure. We will “export our way out of the crisis.”Protectionism and intervention are the problems. Myopic governments that know only how stop to stop, regulate and hinder, never facilitate.

Global currency warsA high-productivity economy survives a strong currency, a low-productivity economy cannot survive even with a weak currency. 

Central banks have always denied currency wars, like the kid who is caught doing a prank. He always says he is not guilty.
If you think the other G-20 countries will stay quiet after the empty statement this weekend, and will not do the same -devalue and restrict-, think again. How can we believe that countries that have increased their restrictive measures in growth periods will avoid doing it but during a crisis? Yes, everyone knows it’s a lost battle in the medium term, but despite the empirical evidence (read “This Time Is Different” by Ken Rogoff), they prefer to carry out “shock” measures that give the appearance of “action” and “protection”.Devaluation is an excuse to keep political spending and does not solve a low margin production model. It is an atrocity that creates inflation, impoverishing citizens, and transfers income of workers and savers to the government and declining sectors, enriching only a few because of rising asset-inflation-risk … The false illusion of economic growth.

Where to invest

When everyone does the same, the “fake enrichment” effect does not work and when it does, it does not last long … But when we add interventionism, corporate earnings plummet, and financial repression, we see lower margins and multiples contract.

Avoid the stocks ​​in “strategic” sectors, which become “ATMs for the States. Commodities?. Only those which see control of  supply -oil- because protectionism and devaluation implies also declining demand. Do not forget the geopolitical risk in stocks as companies see valuations suffer in their “emerging market diversification” assets.More government and devaluation? Disaster
In this situation, the model we see proposed by European “civil platforms” and socialist economists is in Latin America. More public expenditure, a state-controlled social model and devaluation. Chavez without oil.

Devaluations such as those seen in Venezuela or Argentina are not the result of currency wars or speculative attacks. Chavez has made ​​four devaluations since he has come to power because of his excessive spending, which has wiped out the balance sheet of its national oil company PDVSA in “social projects” (11 billion a year), making it the world’s most indebted oil company. Fake currency and spending while emptying the country’s coffers has not improved the economy in a country ravaged by inflation of 22% and black economy. In Argentina, a subsidized employment, intervention and massive currency devaluations have led inflation to soar to 27%. In 1997, public sector employees in Argentina were 720,000. In 2011, 1.5 million, more than double (source: Idesa). 5% of GDP are subsidies, spending in the hypertrophied state is out of control. “Domestic demand” they call it. A true “success”…. And these countries have oil.

In Europe, in order to export any goods we must import energy and commodities, and devaluation makes them expensive. Running to stand still. The questionable short-term positive effect dissipates in the medium  term (“Contracting Effects of Devaluation”, Journal of International Economics).

If all the countries intervene, the global economy stagnates . Velocity of money, which has plummeted, will collapse, and investment with it. Few invest in long-term projects under such uncertainty.

If devaluing and intervening was the solution, Venezuela, Argentina or Zimbabwe would be the kings of the world.I look forward to the next G-20 statement saying there is no currency war or protectionism. It Wasn’t Me.

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